IAG operating profit ascends, still interested in Norwegian

(Sharecast News) - International Consolidated Airlines Group reporting a strong increase in profits at the half-year stage, but not enough to satisfy demanding investors.Willie Walsh, chief executive of the British Airways and Iberia owner, also told BBC radio that IAG remained interested in low-cost, long-haul carrier Norwegian Air after two failed approaches earlier this year.The FTSE 100 group reported second quarter operating profit of €835m before exceptional items, up from a restated €790m a year earlier but short of the €848m consensus. There was a net foreign exchange operating profit impact of €66m.The company's operating profit before exceptional items for the half year was €1.12bn, up 17.4% from last year's restated €950m.Passenger unit revenue for the second quarter fell 1.9%, but was up 2.3% at constant currency, while non-fuel unit costs before exceptional items were down 4.5%, or down 2.0% at constant currency. Fuel unit costs for the quarter rose 6.7%, or 15.0% at constant currency.Looking closer at the books for the half-year, passenger revenue was up 3.6% to €9.94bn, with total revenue ascending 3.1% year-on-year to €11.21bn.Available seat kilometres were up 5% at 154.57 billion for the half, although passenger revenue per available seat kilometre fell 1.3% to 6.43 euro cents.Non-fuel costs per available seat kilometre were down 5.1% at 4.95 cents.Cash stood at €8.15bn as at 30 June - a rise of €202m on a year earlier, with adjusted net debt-to-EBITDAR improving by 0.3 to 1.2x.For the half-year, basic earnings per share surged 141.6% on a statutory basis to 68.3 cents."There was a strong performance in both unit revenue and costs," said Walsh, adding that French air traffic control strikes had continued to challenge the company's operations. "Vueling was particularly affected and incurred an additional €20m of disruption costs in the quarter. These strikes are also having a significant negative impact on the Spanish economy and tourism."Walsh also noted that in July, the firm's new Austria-based, low-cost brand LEVEL began flights from Paris Orly to Montreal and Guadeloupe."We are committed to accelerating LEVEL's growth and its fleet will increase to a total of seven A330-200 aircraft in Paris and Barcelona next year. Also, we launched LEVEL short haul operations from Vienna where it will have four A321 aircraft that will operate to 14 European destinations."For the full year outlook he said: "At current fuel prices and exchange rates, IAG still expects its operating profit for 2018 to show an increase year-on-year. Both passenger unit revenue and non-fuel unit costs are expected to improve at constant currency."Speaking to BBC radio on Friday morning, he said he had bee impressed by the performance of Norwegian. "There is a demand for the product they offer - low haul, low-cost is underserved. Norwegian as part of IAG could be transformed."But he added: "We are not having active discussions with them at the moment."IAG shares fell 4% on Friday morning to just above 652p.Analyst George Salmon at broker Hargreaves Lansdown said: "Sometimes profits rising by the best part of 20% just isn't enough. Unfortunately for IAG, this is one of those times. Simply put, expectations were higher."He noted that some of the miss has come from ongoing French air traffic control strikes, which have prevented the growing Vueling brand from breaking into a half-year profit, while LEVEL was also starting to take off and IAG has its eyes set on the expanding market for low-cost long-haul."That means another approach for Norwegian Air can't be ruled out. There's clear upside to combining the two groups, but as ever, whether it's a good idea or not will depend on price. IAG has been rebuffed twice before, so it's unlikely to get Norwegian on the cheap. That heightens the risk of overpaying."He said investor focus was also on the cost base. "With IAG at the mercy of the ups and downs of the oil price, the most important metric is what IAG has rather clunkily named non-fuel operating costs. These are the ones IAG can control. There's some good news on this front, with costs falling at a faster rate than we've seen recently. However, with the tailwind of low fuel prices fading fast, IAG will need this momentum to continue."