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British Airways owner IAG posts lower profits as it takes hit from French air traffic strikes

IAG's Spanish carrier Vueling took a €20mln charge in the first half related to strike disruptions
A recovery in oil prices led to an 8% increase in fuel unit costs in the first half

British Airways owner International Consolidated Airlines Group PLC (LON:IAG) saw its shares fall on Friday as its profits failed to take off in the first half as French Air Traffic control strikes led to a “significant level” of flight cancellations.

IAG's profit before tax fell to €1.04bn in the six months to June 30 from €1.65bn the same period a year ago, dragged lower by higher fuel prices, an increase in employee costs and unfavourable exchange rates.  A recovery in oil prices led to an 8% increase in fuel unit costs.

French Air Traffic control strikes disrupted operations, particularly the company’s Spanish carrier Vueling, which took a €20mln charge in the first half.

READ: IAG rejected bid target Norwegian Air Shuttle sees second-quarter net profit beat expectations as it reins in costs

“These strikes are also having a significant negative impact on the Spanish economy and tourism,” said IAG chief executive Willie Walsh.

The disruptions were largely responsible for a 1.3% decline in passenger unit revenue to £6.43 in the first half.

However, the airline's total revenue rose 3.1% to €11.20bn and passenger revenue grew 3.6% to €9.94bn as the number of passengers carried rose by 8% to 52.73mln and capacity grew by 5%.

IAG ended the period with cash of €8.15bn, up from €202mln last year.  

The group reduced its pension liabilities by €872mln following a shake-up on its retirement scheme. The company closed its Net Airways Pension Scheme to future accrual in March and will now increase pension payments each year based on consumer price inflation of up to 5%.

In late morning trading, IAG shares on the FTSE 100 index were down 2.7% at 666.4p.

Focus on the cost base

George Salmon, equity analyst at Hargreaves Lansdown commented: “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 added: “For now, the focus is 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.”

July traffic increases

Separately, IAG said traffic increased in July with the number of passengers up 6.9% year-on-year to 11.49mln.

Revenue passenger kilometres rose 7.55 to €26.61mln as capacity increased 5.7%.

In July the company's new budget airline Level launched its short-haul operations from Vienna where it will have four A321 aircraft that will fly to 14 European destinations.

READ: British Airways owner IAG to expand long-haul operations from Vienna with Level airline

It also started flights from Paris Orly to Montreal and Guadaloupe. IAG said two new A330-200s will be added to its fleet, bringing a total of seven aircraft in Paris and Barcelona next year.

IAG still interested in buying Norwegian Air

Meanwhile, Willy Walsh told the BBC that IAG remained interested in buying budget airline Norwegian Air Shuttle after the two held talks earlier this year.

“We believe that long-haul, low cost is a segment of the market that is underserved and we believe that we can do so profitably,” Walsh told BBC Radio.

“So while their financial performance has been stressed, I think Norwegian as part of IAG could be transformed. We’re not in any active discussions with them at the moment. We continue to look at Norwegian and we continue to have some interest in it.”

IAG bought a 4.6% stake in Norwegian in April and has made two offers for the airline, both of which were rejected.

 -- Adds share price, analyst comment --

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