British Airways Owner IAG Posts Record Profit as Fares Rally

(Bloomberg) -- British Airways-owner IAG SA posted record first-quarter earnings as expenses fell and joined Air France-KLM Group in signaling that increased demand from business travelers is poised to boost prices.

Operating profit before one-time items rose 9.7 percent to 170 million euros ($187 million), aided by lower labor and fuel costs, IAG said Friday. A slide in fares slowed, paving the way for what should be the first gain in three years in the second quarter and propelling the group toward higher full year earnings.

IAG's performance indicates that concerns about over-capacity are fading among European carriers, after Air France-KLM also reported a strong start to 2017 on Thursday. The London-based company said corporate bookings gained in the North America market, the biggest for premium travel, while recovering in Brazil. Demand is also picking up in Asia, where anxiety about terrorist attacks had led people to avoid leisure trips to Europe.

“We're seeing an improving trend and it's moving faster than we would have expected,” Chief Executive Office Willie Walsh said on a conference call. “This is a record performance in the first quarter, which is traditionally our weakest.” Twelve-month operating profit is set to gain and fares could also show an increase over the year as a whole, he said.

IAG, which also owns Spain's Iberia, Aer Lingus of Ireland and discount specialist Vueling, rose as much as 6.7 percent, the most in six months, and traded 4.9 percent higher at 600 pence as of 11:16 a.m. in London. That takes the stock's gains this year to 36 percent and values the company at 12.6 billion pounds ($16 billion).

Early Turnaround

IAG's employee costs decreased 6 percent and the fuel bill was down 11 percent. Passenger unit-revenue, which reflects fares, fell 3.1 percent during the period at constant currencies, improving from a 4.3 percent decline in the fourth quarter of 2016.

The trend is expected to turn positive in the current three months for the first time since the second quarter of 2014.

“We always believed we would move into positive passenger unit-revenue,” Walsh said. “The question we had internally was when that would happen, and that's happening earlier than we planned.”

Air France-KLM's unit revenues fell only 0.5 percent in the first quarter at constant currencies, while rising 4.9 percent in premium classes. At the same time, cost performance failed to match that at IAG, leading the company to post a loss of 143 million euros.

IAG's traffic, or the number of passengers carried times the distance flown, increased 3.3 percent, led by a 12 percent gain in the Asia-Pacific market. Travel on premium routes surged 6.9 percent in March. Demand began to rebound in the second half of last year as June's Brexit vote had less of an impact on traffic than the company had anticipated.

Extra Seats

The group now plans to increase capacity 2.8 percent over the course of 2017, faster than the 2.5 percent advance flagged earlier. Among markets likely to see extra seats are Brazil and Argentina as the Latin American economy improves, Walsh said. Aer Lingus and Iberia will see the biggest gains, while BA could curb supply to help accelerate price increases over the summer.

Revenue at IAG advanced 2.8 percent in the first quarter, held back by the timing of Easter and the weakness of the pound, which reduces the value of British receipts when translated into euros.

While Deutsche Lufthansa AG posted a first-quarter profit for the only time in almost a decade, its numbers were propped up by cargo shipments and aircraft maintenance. The German company said Friday that ticket prices will continue to fall in 2017, reiterating guidance for “slightly” lower full-year earnings.

Though Walsh built IAG through a series of mergers, he said he has “no interest whatsoever” in Alitalia SpA and its assets following the Italian company's decision to file for bankruptcy.

At the same time, the CEO said he expects further consolidation in the European airline industry this year, adding that that would be positive in terms of capacity control and pricing, and that IAG would most likely seek no remedies from regulators in the event of a Lufthansa bid for ailing Air Berlin Plc.

For the time being, IAG is focused on its own expansion. Its new Level unit, which will operate low-cost trans-Atlantic flights from Barcelona starting next month, will open one or two more bases next year and is looking to add two or three more aircraft, Walsh said. Of four routes on sale, a Buenos Aires service is proving the most popular, he said.

To contact the reporter on this story: Benjamin Katz in London at bkatz38@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Christopher Jasper