"We Think International Consolidated Airlines Group's (LON:IAG) Solid Earnings Are Understated"

In the ever-evolving landscape of the airline industry, International Consolidated Airlines Group (LON:IAG) has emerged as a standout performer, with its recent financial results painting a picture of robust growth and strategic acumen. As investors, it's crucial to delve beyond the surface-level numbers and understand the underlying factors driving IAG's success. Let's explore why we believe IAG's solid earnings are understated and why this could be a compelling opportunity for income-seeking investors.

Strong Financial Performance

IAG's financial performance in 2024 speaks volumes about its resilience and strategic prowess. The group reported a revenue of €32.1 billion, an 8.99% increase from the previous year. This growth is particularly impressive given the challenges faced by the airline industry during the pandemic. The earnings for 2024 were €2.73 billion, a 2.90% increase from the previous year. These numbers are not just about recovery; they reflect a strategic turnaround and a focus on operational efficiency.

IAG's operating profit before exceptional items for 2024 was €4.44 billion, marking a 26.7% increase from the €3.51 billion reported in 2023. This significant increase in operating profit is a testament to the effectiveness of IAG's strategy and the quality of its airlines. The group's operating margin before exceptional items reached 13.8%, up from 11.9% in 2023. This margin expansion is a key indicator of IAG's operational efficiency and cost management, positioning it favorably against industry peers.



Strategic Initiatives Driving Growth

IAG's strong earnings are not just a result of market recovery but also a testament to its strategic initiatives. The company has been investing heavily in fleet modernization, adding 19 new aircraft in 2024 and planning to receive 26 additional units in 2025. This includes two wide-body aircraft and 10 Airbus A321XLRs, which enable higher route profitability and increased frequencies to key destinations. British Airways and Iberia are also upgrading their cabin products, introducing new business-class suites and expanding premium offerings on long-haul routes. These upgrades not only improve passenger satisfaction but also allow IAG to command higher fares, contributing to increased revenue and profitability.

Another strategic initiative is IAG's focus on sustainability. The company achieved its carbon intensity target ahead of schedule, reaching 78.1 gCO₂/pkm, below the 80 gCO₂/pkm goal. IAG has signed strategic agreements with SAF suppliers such as Repsol, Twelve, and Infinium, securing the necessary supply to meet the 2% SAF mandate in the UK and EU by 2025. This initiative not only enhances IAG's sustainability credentials but also positions the company as a leader in the industry's transition to more environmentally friendly practices.

Market Presence and Operational Efficiency

IAG's strategic initiatives have also been effective in enhancing its market presence and operational efficiency. British Airways continues to grow in North America, focusing on premium travel. By late 2025, it will be the only airline offering a First-Class cabin on transatlantic flights from London. Iberia has strengthened its leadership in the Europe-Latin America market, increasing its market share in the region by three percentage points compared to 2019. In 2024, Iberia increased frequencies to Buenos Aires, São Paulo, Santiago de Chile, and Santo Domingo. In 2025, it will add more flights to Lima and continue expanding in South America. LEVEL, IAG’s low-cost carrier, expanded capacity in Santiago de Chile and will operate the Barcelona-Santiago route year-round starting in 2025. LEVEL also obtained its air operator certificate (AOC), becoming an independent airline. These initiatives have been effective in enhancing IAG's market presence and operational efficiency, as evidenced by the broad-based growth in passenger traffic, with IAG carrying 122 million passengers in 2024, a 5.6% increase compared to 2023. The load factor reached 86.5%, with Latin America and the Caribbean standing out—capacity in the region increased by 12.2%, further solidifying IAG’s presence in this market.

Long-Term Financial Health and Competitive Advantage

IAG's focus on sustainability and fleet modernization significantly impacts its long-term financial health and competitive advantage in the airline industry. By achieving its carbon intensity target ahead of schedule, reaching 78.1 gCO₂/pkm, below the 80 gCO₂/pkm goal, IAG demonstrates a commitment to environmental responsibility. This not only aligns with regulatory requirements but also enhances the company's reputation among environmentally conscious consumers and investors. The strategic agreements with SAF suppliers such as Repsol, Twelve, and Infinium secure the necessary supply to meet the 2% SAF mandate in the UK and EU by 2025, further solidifying IAG's position as a leader in sustainable aviation.

Fleet modernization is another key area where IAG is investing heavily. The addition of 19 new aircraft in 2024 and plans to receive 26 additional units in 2025, including two wide-body aircraft and 10 Airbus A321XLRs, enables higher route profitability and increased frequencies to key destinations. This investment in larger, more efficient aircraft reduces costs and enhances the customer experience, as highlighted by IAG. British Airways and Iberia are also upgrading their cabin products, introducing new business-class suites and expanding premium offerings on long-haul routes. These upgrades not only improve passenger satisfaction but also allow IAG to command higher fares, contributing to increased revenue and profitability.

The financial benefits of these initiatives are evident in IAG's strong financial performance. The company's operating margin before exceptional items reached 13.8%, up from 11.9% in 2023, while free cash flow rose to €3.56 billion after an investment of €2.82 billion in the business. IAG also reduced its net debt by €1.73 billion, closing the year at €7.52 billion. This disciplined capital allocation and focus on operational efficiency have allowed IAG to maintain a strong balance sheet, reducing its net leverage ratio to 1.1x, down from 1.7x in 2023 and 3.1x in 2022. The group plans to continue lowering its debt through bond buybacks and increasing the number of unencumbered aircraft, further strengthening its financial position.

Conclusion

In conclusion, IAG's solid earnings are understated, and the company's strategic initiatives and focus on sustainability and fleet modernization position it for long-term success. As income-seeking investors, IAG offers a compelling opportunity with its strong financial performance, operational efficiency, and market presence. While the airline industry is known for its volatility, IAG's disciplined approach and strategic acumen make it a standout performer worth considering for your investment portfolio.