February 29, 2012 / 7:30 AM / in 6 years

UPDATE 3-IAG cautious on year ahead after strong 2011

* 2011 operating profit 485 mln eur vs 470 mln eur f‘cast

* Year revenues 16.3 bln eur vs 12.3 bln eur a yr eariler

* Cost, revenue synergies from merger 74 mln euros in 2011

By Rhys Jones

LONDON, Feb 29 (Reuters) - International Airlines Group, the owner of British Airways and Iberia, said its underperforming Spanish unit and high fuel costs would dent earnings this year, after it reported a forecast-beating rise in 2011 profit.

“BA is making money and Iberia is losing money. The Spanish economy is weak and operating costs at Iberia are too high, unacceptably so, but this is being tackled,” chief executive Willie Walsh told reporters on Wednesday.

IAG, Europe’s fourth-biggest airline group by market value, said 2011 operating profit doubled to 485 million euros ($651 million), helped by higher than expected cost savings from the BA-Iberia merger and strong growth in business and first class traffic, especially on transatlantic routes.

The group was expected to report a 2011 operating profit of 470 million euros, according to a Thomson Reuters I/B/E/S poll.

IAG said profit in the final three months of 2011 grew well but that the outlook was uncertain due to soaring fuel costs and financial uncertainty in the euro zone, especially in Spain.

Industry body IATA said on Wednesday the global airline industry would suffer in 2012 because of continuing high fuel prices and the euro zone debt crisis, even though passenger traffic rose in January from a year earlier and the slide in air freight seemed to have tapered off.

Germany’s Lufthansa and Air France-KLM have embarked on cost cutting programmes, trimmed profit forecasts and slashed plans to expand capacity this year after results were battered by high fuel costs and weakening consumer demand.

IAG said its fuel costs rose nearly a third in 2011 to just over 5 billion euros but that it managed to cut non-fuel costs by 5.6 percent.

“Higher fuel costs, weaker European markets and labour unrest will imply, for the first part of the year, a reduction in operating results when compared with the first half of last year,” Walsh said.

Walsh also warned that the London Olympics could hit BA because host nations usually suffer weaker demand for flights.


BA and Iberia sealed an $8 billion merger in 2010, a move that helped the pair stem huge losses following the worst industry downturn in decades.

IAG, whose 2011 sales rose 10.4 percent to 16.3 billion euros, achieved cost and revenue synergies of 74 million euros, 64 million more than targeted, in its first full year since the merger.

IAG shares, which have risen 16 percent in the last month, were 2.2 percent up at 166.8 pence by 1115 GMT, valuing the group at 3 billion pounds.

“The company’s fuel bill will rise by another 1 billion euros in 2012 - it more than covered the extra fuel in 2011 and we’re optimistic that it can again in 2012,” said RBS analyst Geoff van Klaveren, adding that demand in London remained strong with encouraging trends in long-haul premium, particularly on North Atlantic routes.

Late last year, IAG agreed to buy Lufthansa’s British unit bmi for 172.5 million pounds to get hold of its coveted runway slots at London’s Heathrow airport. Walsh said he was confident the deal would be cleared by competition regulators and close by the end of March 2012.

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