By Sarah Young
LONDON (Reuters) - British Airways owner IAG (L:ICAG) laid out plans to pay a maiden dividend, coming of age three years after it was created in a merger between BA and Spain's Iberia.
International Airlines Group said it was confident of increasing profit by more than 10 percent a year between 2016 and 2020, on top of significant growth this year and next. As a result it said it anticipated announcing next year that it would start paying shareholders.
"We remain confident in meeting our 2015 financial targets which we see as the trigger to introducing a dividend," it said in a statement ahead of an investor day on Friday.
BA and Iberia sealed an $8 billion (5.06 billion British pounds) merger in 2011, a move which helped both stem huge losses following the worst industry downturn in decades. Years of tough restructuring followed - with thousands of job cuts and salary and capacity reductions.
Before the 2011 tie-up, neither BA nor Iberia had paid a dividend since 2008.
The dividend due to be introduced next year would be based on a payout ratio of 25 percent of the company's underlying profit after tax, IAG said.
The restructuring plus the introduction of new, more fuel efficient planes has put IAG on a strong footing, leaving its European rivals fighting to keep up in the face of competition from short-haul budget airlines and long-haul Gulf carriers.
It has outperformed Air France-KLM (PA:AIRF) and Lufthansa (DE:LHAG), which have a history of stormy relations with their powerful unions and have been hit by strikes.
Also helping IAG's profits are the healthier economic growth in the British and U.S. economies - to which it has more exposure due to its strong trans-Atlantic business - compared with the French and German economies on which the rival airlines are more reliant.
And while Lufthansa and Air France try to expand their discount operations and reduce costs to compete with budget carriers like Ryanair (I:RYA) and easyJet (L:EZJ), IAG has already been benefiting from its acquisition of Spanish no-frills airline Vueling in 2013.
VOLATILE
Shares in IAG, which have jumped about 20 percent over the last month against a 1.3 percent rise Britain's bluechip index (FTSE), were up 0.7 percent at 0952 GMT.
Looking to the 2016 to 2020 period, IAG said it would target average earnings per share (EPS) growth of over 10 percent a year and an operating profit margin of 10 to 14 percent.
It already expects to increase operating profit by as much as 78 percent in 2014, and by a further 31 percent to 1.8 billion euros in 2015.
"While long-term targets in the volatile airline industry need to be taken with a pinch of salt, at least we have confirmation of a dividend and confidence in the future," Jefferies analyst Ian Rennardson said.
Some analysts had indicated that an upgrade to 2015 profit guidance, or a dividend payout for this year rather than next year, were possibilities, after IAG posted strong third-quarter results in October.
IAG powered ahead in the quarter, in contrast to Air France-KLM which warned on 2014 profit and Lufthansa, which lowered its guidance for next year's profit.
Sustainable dividend payouts have been patchy in the European airline sector.
Lufthansa restored its dividend payout in March for 2013 results after not paying out on its 2012 results. However, shares were hit last week when its chief financial officer said the size of the payout on 2014 results may be limited by falling interest rates and the costs involved with outsourcing part of its IT division.
Air France-KLM did not pay a dividend on its 2013 results.
(Additional reporting by Victoria Bryan; Editing by Paul Sandle and Pravin Char)