BA-owner IAG lags Lufthansa on revenue trend, shares fall

LONDON (Reuters) - British Airways owner IAG ICAG.L said it expected profits to rise by nearly 20 percent this year thanks to strong travel demand and lower costs, but its shares dropped over concerns that revenue trends were weaker than those of rivals.

Air Berlin AB1.DE, Britain's Monarch [MONA.UL] and Alitalia [CAITLA.UL] have all gone into administration this year due to tough competition.

The industry shakeout could help Europe’s stronger carriers, such as IAG, by giving them opportunities to grow and relieving some of the pressure on ticket prices.

IAG, which has been bullish on revenue trends this year, said on Friday it had seen passenger unit revenue - a closely watched figure - rise 2.2 percent. It forecast another rise in the measure for the final months of this year.

However, the figure was below the 4.5 percent improvement reported by rival Lufthansa for the key summer months on Wednesday.

IAG’s shares dropped 5 percent, having hit an all-time high on Wednesday, as analysts focussed on the passenger unit revenue trend and transatlantic routes, where British Airways faces competition from low cost carriers.

Shares in the group, which also owns Iberia, Aer Lingus and Vueling, are up nearly 50 percent this year.

FILE PHOTO: British Airways planes are parked at Heathrow Terminal 5 in London, Britain May 27, 2017. REUTERS/Neil Hall/File Photo

Level, IAG’s new low-cost, long-haul unit, and Aer Lingus have rapidly added capacity, especially to transatlantic routes, diluting the group’s revenues per passenger and mile flown.

“We consider the results to be broadly encouraging, but there may be an adverse short-term reaction to the unit revenue trend,” Liberum analysts said in a note.

CEO Willie Walsh told analysts that stripping out Aer Lingus, Level and three new BA transatlantic routes, unit revenue had grown by slightly over 1 percent on the North Atlantic routes.

“We see this as a solid performance,” he said, adding that transatlantic demand was good. By comparison, Lufthansa said its North America unit revenue rose 3.9 percent in the third quarter.

Unit costs across IAG fell, helped by a drop in the fuel price. However, it added a further 65 million euros(£57.63 million) in costs related to a computer system failure at British Airways that stranded 75,000 people over a May bank holiday weekend.

Bernstein analysts said the cost cut added a sheen to results that were less impressive at an underlying level, with a growth rate that seemed to imply it was losing market share.

Walsh said recent consolidation left opportunities for more efficient players such as IAG to grow, and slammed Italy’s government for continuing to prop up ailing Alitalia with loans. He said Vueling could expand in Germany and Italy.

Walsh confirmed IAG’s interest in acquiring Monarch’s airport slots at London Gatwick, whether via the administrators or the usual slot distribution process. Monarch’s administrators are seeking court approval to sell the slots.

IAG said third-quarter operating profit before exceptional items rose 20.7 percent to 1.46 billion euros ($1.70 billion), slightly ahead of a company-compiled analyst consensus of 1.4 billion euros.

The airline group said it expected operating profit for the full year to be 3 billion euros before exceptional items, up 18.3 percent on last year. It previously said it expected a double-digit rise for the full year.

Additional reporting by Helen Reid and Victoria Bryan; editing by Kate Holton, Alexander Smith and Adrian Croft