IAG ups spending targets to lift earnings
British Airways owner IAG said it will target a higher level of profits in the coming five years, with a higher capital spend and greater carrying capacity.
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At an investor event on Friday, the airline group's management, led by chief executive Willie Walsh, will set out its plan to generate average underlying operating profits of €7.2bn per year, up from the previous target of €6.5bn for 2018-2022.
The airline industry has been hit by more turbulent conditions of late, and faces continued challenges from higher fuel costs, ongoing pay strikes by pilots and cabin crew, strikes by air-traffic-controllers, and with UK-based carriers also undermined by Brexit uncertainty.
What's more, last month UK competition authorities launched an investigation into the 10-year revenue-sharing joint venture agreement between IAG's British Airways and Iberia subsidiaries with Finnair and American Airlines since 2010. The CMA said it was examining the deal over worries it may be "restrictive of competition”, with the parties co-operating on pricing, capacity and schedules.
Putting that to the background, Walsh and co will maintain existing targets for 15% return on invested capital, 12-15% operating profit margins and 12%-plus average earnings per share growth.
London and Madrid-listed IAG will increase investments, upping its average net capital expenditure per year to €2.6bn per annum, from €2.1bn previously, as it looks to bump up carrying capacity, to 6% annual growth in average seat kilometres compared to the 5% it previously was aiming for.
To keep up its much-appreciated dividend, the equity free-cash flow target remains at €2.5bn per year.
The aim is also to keep gearing in the investment grade zone, which was given the backing of analysts at ratings agency S&P a day earlier.
S&P reaffirmed IAG's BBB- credit rating, saying the group's financial strength would be sufficient to cope with current operational challenges.
"The stable outlook reflects our expectation that IAG will maintain profitable growth, while its heavy capex requirements will be largely covered by solid operating cash flows, translating to adjusted funds from operations to debt of well above 30% over the next two years," analysts said.
The UK’s competition regulator on Thursday said it was starting a probe into a revenue sharing deal on trans-Atlantic routes between British Airways, Iberia, Finnair and American Airlines.