Proactive Investors - British Airways owner International Consolidated Airlines Group (LON:ICAG) SA (LSE:IAG) soared to new heights in the first half of 2023 but while the shares took off today they remain relatively grounded compared to pre-pandemic levels.
Half-year profits flew to a record level as passenger traffic skyrocketed in the first half of 2023, boosted by pent-up travel demand and easing restrictions in Asia.
Operating profit of €1.25bn in the second quarter soared from €295mln last year and beat consensus forecasts of €895mln, with Spanish wing Iberia enjoying a record profit for any quarter.
This was with the seasonally strongest third quarter still to come this year, with BA also expected to increase both revenue and profitability in the second half as its network expands to Hong Kong and Singapore.
Headwinds ahead
But despite these positive signs, the journey isn't free of turbulence, as while the shares rose almost 5% so far today to 162.4p and are up by a third in the past 12 months, they still sit 64% below where they were at the start of 2020.
Investors should also be celebrating the fact that capacity is almost fully restored to pre-pandemic levels, which gives the airline group the best chance of capitalising on demand, said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown (LON:HRGV).
She said investors and management needed to monitor "risk, and cost, of disruption outside the group’s controls".
The absence of full-year profit guidance also "may provoke some unease" in investors, said analyst Geriold Khoo at Liberum.
Weaker demand and industrial action have been weighing on sentiment towards the airline sector in general, said John Moore, senior investment manager at RBC Brewin Dolphin, creating "potential turbulence ahead".
Olly Anibaba at Third Bridge also flagged challenges of pilot shortages and wage inflation pressures, which he said may have a detrimental effect on network expansion plans, while Russ Mould at AJ Bell said weakness in cargo operations was a problem too.
The outlook for business demand is "murkier than leisure", said Lund-Yates, with this corner of the market a lot more important to IAG than it is for the likes of budget airline rivals like easyJet (LON:EZJ).
"As consumer sentiment potentially weakens towards the end of this year, it’s also possible that the likes of BA may see the rate of bookings slow. IAG has done an awful lot to get itself out of a downwards spin, and is now on an even keel, but unfortunately as far as mapping demand goes, it’s not out of the woods."
Optimism exists
There was more optimism from Alexander Paterson at Peel Hunt, who kept his 'buy' rating in place and noted better unit revenues, lower costs and a significant cut in net debt.
"We see upside to forecasts given robust yields and forward bookings of circa 80% of third-quarter and 30% of fourth-quarter capacity," he said.
Mould felt forward bookings were "fine but not outstanding" but said debt is now at "more manageable" levels, having ballooned during the pandemic as demand dried up.
"Now, with both of these issues being addressed, it can focus on strengthening the business and planning for the future.
"Hiring more staff and leasing extra planes as back-up will help provide some resilience and money ploughed into IT systems and airport lounges is also a sign that International Consolidated Airlines is regaining focus and not simply trying to get through one day at a time."
Finally, while air travel demand has proved resilient in the past year and a half, future growth is expected to be curtailed due to less need for business travel following the rise of Zoom and Team video meetings, while climate worries among consumers are growing.
On top of this, Rico Luman at ING said that sustainable aviation fuels will start to push up ticket prices, with carbon prices in Europe will gradually kick in more strongly in coming years.
"Higher fares won’t hold consumers back from flying, but will probably temper the pace of growth," he said.
As IAG looks to capitalise on its current momentum, only time will tell if ths record performance is a sign of sustained recovery or the peak before the trough.