Recovery at Aer Lingus owner IAG is ‘underappreciated’ by investors, say analysts
Aer Lingus owner IAG is developing as a "positive equity story" as it emerges from the worst of the after-effects of the pandemic, according to analyst James Goodall at Redburn.
He said that consensus estimates for the group’s performance are now “materially underappreciating” the earnings recovery at the group, driven by margin restoration at British Airways. He has upgraded the IAG shares to ‘buy’.
Apart from owning Aer Lingus and British Airways, IAG also owns Iberia, Vueling, Level and is in the process of buying Spanish carrier Air Europa.
“Our easing concern over IAG’s balance sheet not only provides less pressure to a positive investment case but also leaves us more optimistic over the Air Europa acquisition, where we see material synergies,” according to Mr Goodall.
IAG, whose chief executive is Luis Gallego, agreed last month to pay €400m to buy the remaining 80pc of Air Europa that it doesn’t already won.
IAG plans to use the carrier to deepen its presence in the Latin American market and expand to Asia from its Madrid hub. IAG will also assume €2bn of debt with its Air Europa purchase.
Mr Goodall pointed out that British Airways generated two-thirds of IAG’s earnings before interest and tax in 2019.
“Its recovery is, therefore, critical to the revival of group earnings,” said Mr Goodall. “While 2022 saw group margins recover to just over 5pc, this was still heavily impacted by Covid restrictions and the war in Ukraine.”
He said that while at the operating company level, all IAG’s airlines generated positive margins but, notably, it was British Airways’ margin profile that has fallen the furthest.
Aer Lingus made a €45m operating profit last year compared with a €347m loss in 2021
Mr Gallego has said that all IAG’s carriers will be profitable this year. Aer Lingus, whose chief executive is Lynne Embleton, made a €45m operating profit last year compared with a €347m loss in 2021 as passenger traffic recovered strongly during 2022. Its revenue last year touched €1.8bn, compared with €367m the year before.
Mr Goodall said that at the group level, many investors were left disappointed with IAG’s cost performance last year – especially in context against the cost progression seen in Europe’s other major network airlines and some low-cost carriers.
“Notably, IAG’s cost inflation stems mainly from just one airline – British Airways,” he explained.
“Analysing the ex-fuel cost progression of the various operating companies shows that Vueling and Aer Lingus achieved ex-fuel costs in line with 2019 levels in 2022, Iberia was 11pc ahead and BA was an eye-watering 36pc ahead.”
But Mr Goodall attributed the performance on that front for British Airways to the “sedate recovery” of its capacity relative to other airlines in the group.
He added that In the five years after their acquisition compared with the five years prior, Vueling’s margins improved to 8pc from 5pc, while Aer Lingus’ margins improved from 5pc to 13pc, as both cost and revenue benefits from integration into the group were unlocked.
He believes Air Europa will similarly benefit from being part of IAG, with “substantial synergies” expected.