International Consolidated Airlines Group PLC (LON:IAG) shares flew lower as it posted third quarter profit that beat expectations but saw a slowdown in passenger revenue growth.
The British Airways owner said operating profit before exceptional items rose to €1.46bn in the three months to 30 September from €1.2bn a year ago, ahead of a company-compiled consensus forecast of €1.4bn.
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IAG said it expects to deliver a record operating profit for the 2017 full year of around €3bn, compared to €2.5mln in 2016. The airline, which also owns Spanish carrier Iberia, Ireland's Aer Lingus and budget unit Vueling, has previously said it anticipates double-digit growth in full year operating profits.
An improved performance in Spain and Latin America boosted passenger unit revenues, which rose 2.2% at constant currencies following a 4.8% increase in the second quarter. Passenger numbers grew 3.3% to 80,065.
However, shares fell 4.25% to 641p in morning trading as analysts raised concerns about the easing of passenger unit revenue.
“Modest outperformance of consensus in Q3 and a slight improvement in FY guidance was encouraging,” said Liberum.
“However, there may be short-term concerns about unit revenue trends, with the Q3 improvement (+2.2% constant currency) slower than Q2 and Lufthansa's Q3 outturn.”
IAG fends off disruption from terrorism, severe weather
Chief executive Willie Walsh said the company’s performance was “good” despite the disruption from severe weather and terrorism.
Profits were also lifted by the group’s restructuring efforts and a 7.5% drop in fuel unit costs before exceptional items.
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IAG reported €180mln in restructuring costs at Iberia and a €91mln charge for its transformation of British Airways for the quarter.
The group has also been expanding its operations, adding a new budget long-haul unit serving trans-Atlantic routes this year. The Barcelona-based trans-Atlantic unit, called Level, started flying in July and IAG plans to grow to more locations in Europe with 30 planes by 2022.
IAG proposed an interim dividend of 12.5 euro cents per share.
IAG's premium brands at risk in economic downturn, says Hargreaves
George Salmon, equity analyst at Hargreaves Lansdown said IAG's shares have been "soaring" because it has been able to hold up fares compared to budget airlines that have had to slash prices amid rising competition.
However, IAG's more premium brands are at greater risk if the economy takes a turn for the worse, he warned.
"In a downturn, business class sales tend to dry up faster than demand for cheap holidays, while the group’s significant fixed costs have to be paid whether the planes are full or not. With this in mind, it would be nice to see the group get a firmer grip on non-fuel costs, which have again ticked up on an underlying basis.”