Sparks - International Airlines Group

International Airlines Group (IAG) has delivered a robust set of results, with Q226 operating profit before exceptional items of £1,406m about 4% ahead of the company-compiled mean consensus forecast of £1,355m. Q226 bore the full impact of the Middle East crisis, with revenue broadly flat, increasing by 0.2%, and operating profit before exceptional items declining by c 16%, with recovery of fuel costs in line with management’s guidance.

The revenue performance reflects a combination of higher yields offsetting lower-than-expected  capacity as a result of the Middle East conflict, as well as the shift in the timing of Easter. In Q226, capacity fell by 0.5%, yield increased by 1.6% and unit non-fuel costs fell by 1.7%. Following a good  Q126, which bore only some disruption from the Middle East crisis, the Q2 performance took H126 capacity to -0.1%, yield to 2.4% growth (or 6.2% at constant currency) and unit non-fuel costs to -1.3% versus H125. Fuel costs provided an incremental drag on Q226’s operating profit of £489m at constant currency, which meant that operating profit for all of the airline brands fell, partially offset by an increase by IAG Loyalty. Despite the decline in profit, the 15.8% operating margin is sector-leading.

There was a significant improvement in free cash flow to £2,905m, from £2,097m in H125.

With respect to the outlook for FY26, management has downgraded its expectations for capacity growth to flat and fuel costs to £8.6bn (based on the 27 July curve), from £9.0bn expected in the Q126 results. The guidance for capex has also reduced modestly to £3.4bn, from £3.5bn previously.

Management is confident of delivering a full-year operating margin within the 12-15% target range.