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British Airways Owner IAG Scrapes a Profit Despite Fare War

Lucca de Paoli
British Airways Owner IAG Scrapes a Profit Despite Fare War

(Bloomberg) -- IAG SA eked out a profit in the first quarter even after the impact of a European fare war that pushed its biggest rivals to a loss.

Shares of the British Airways owner rose as much 5.1% after it posted an operating profit of 135 million euros ($151 million) Friday, while reiterating its full-year guidance and predicting that pricing will pick up in coming months.

The earnings figure was still 60% down from a year earlier as higher fuel costs and the timing of Easter further eroded margins. Deutsche Lufthansa AG reported a 336 million-euro loss and Air France-KLM Group suffered a 303 million-euro shortfall.

“Most European airlines have been reporting losses in the quarter. That’s what sets us apart,” IAG Chief Executive Officer Willie Walsh said on a conference call. He suggested that the “capacity issue” is set to ease and stood by a forecast for annual earnings in line with last year’s 3.48 billion euros.

London-based IAG, which hit a two-year low on Thursday, traded 4.4 percent higher at 510.60 pence as of 11 a.m. in the U.K. capital. That pared the stock’s slide this year to 17%, compared with declines of 5% and 7.4% at Lufthansa and Air France-KLM respectively.

IAG’s passenger unit revenue, a measure of fares, fell 0.8% at constant currencies in the quarter, with declines sharpest in Europe and on routes to Latin America. Walsh said Brazil and Argentina were especially weak amid an economic slowdown, with demand also “softening” on routes to South Africa.

The lucrative North Atlantic market, by contrast, remained buoyant, with forward booking trends also positive, according to the CEO, who also said there’s no evidence that confusion surrounding Britain’s exit from the European union is impacting demand.

The fuel bill came in 16% higher, but IAG is more than four-fifths hedged for the rest of the year so that the increase in costs should moderate before reversing in 2020.

Walsh said he’ll trim IAG’s capacity plans in response to market conditions, with the company now set to boost seating 5.3% for the year rather than 5.9%. Though that compares with a 6.1% hike in 2018, it’s still more bullish than plans at Lufthansa, which is freezing capacity at its Eurowings discount arm.

Max Impact

Groundings of Boeing Co. 787 jets equipped with the latest Rolls-Royce engines for maintenance checks are “annoying” and will disrupt some flights this summer, according to Walsh, who also confirmed that delayed deliveries of the Airbus SE A321neoLR plane to Irish unit Aer Lingus will put back the launch of a new route to Montreal.

While IAG has no orders for Boeing’s stricken 737 Max jet, the CEO said the idling of the model by safety regulators following two crashes in five months should moderate capacity growth in Europe stretching into the third and fourth quarters. Among carriers due to take the plane is Ryanair Holdings AG, Europe’s biggest low-cost operator.

Walsh said IAG won’t be bidding for any airline assets of Thomas Cook Group Plc as the tour operator seeks to raise cash from disposals, and ruled out a renewed bid for Norwegian Air Shuttle ASA after initial approaches were rejected by the Scandinavian discounter.

(Updates with company’s comments on weaker markets, capacity plans, fuel costs and M&A starting in sixth paragraph.)

To contact the reporter on this story: Lucca de Paoli in London at gdepaoli1@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper, Andrew Noël

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