IAG: Spanish, British, Irish
and Qatari Mar/Apr 2024

Comparisons with the prior year are flattering. Compared with prepandemic 2019, the group carried only 2.3% fewer passengers (3.5% less in RPK terms) on capacity 4.3% lower. It ended the year with a fleet of 582 aircraft, only 16 units lower (2.6%) than at the end of 2019. Total revenues however were 15% higher than those achieved in 2019; operating profits 7% and net profits 11%. The Group reported an ROIC of 14.8%, within its medium term range “ambition” of 13-16%, and 20 basis points higher than in 2019.

Source: Company reports; forecasts Barclays

IAG had some major advantages during this stage of the recovery from the pandemic, in comparison with its arch-rival European peers, Air France-KLM and Lufthansa.

FY ended Dec (€m)	2019	2020	2021	2022	2023		At end Dec (€m)	2023
Revenues	25,506	7,868	8,450	23,066	29,453		Fleet, Property	19,776
Net Result	2,387	(4,337)	(3,038)	431	2,655		Other Fixed Assets	3,291
							Intangible Assets	3,909
Operating cash flow	4,002	(3,296)	(141)	4,854	4,864		Current Assets	10,704
Net capex	(2,658)	1,562	(181)	(3,463)	(3,423)		of which Cash	6,837
Free cash flow	1,344	(1,734)	(322)	1,391	1,441		Current liabilities	(16,979)
Increase in debt	49	1,053	2,259	(79)	(5,271)		Long term debt	(13,831)
Equity/(dividends)	(1,308)	2,621	(24)∗	(23)	(77)		Other liabilities	(3,592)
Total cash flow	85	1,940	1,913	1,289	(3,907)		Equity	3,278

Notes: ∗ Treasury shares

Spain and UK Domestic

Iberia and Vueling are based in Spain which has the largest domestic market in Europe — as well as being the short haul holiday destination of choice for much of the continent. There are suggestions that the local population was more eager to return to the workplace post working from home in lock-down than some other nationalities — Spain even introduced a Digital Nomad Visa at the end of 2022 to take advantage of the WFH trend and attract high value talent to its shores (although,possibly because of tortuous Spanish bureaucracy, it only issued 300 such visas in 2023).

IAG’s domestic passenger numbers (which include BA’s operations in the small UK domestic market) were up by 14% year on year to 29.2m (representing 25% of the group’s total passenger numbers), and 3% more than the number carried in 2019.

This echos the figures from AENA, which operates Spain’s airports. Total 2023 passenger numbers in its Spanish airports grew by 16.2% year on year ending up 3% higher than 2019 levels: domestic +12.6% (+7.25%); international +18.2% (roughly the same as in 2019).

Westward Facing

IAG’s long haul traffic is strongly focused on the Atlantic. British Airways' base in London is the principal European gateway on the North Atlantic; and Iberia’s Madrid that for the South. Both, with strong linguistic and cultural links, have strong O&D traffic flows; and, being on the western edge of Europe, can offer some of the least circuitous connecting routes for passengers who have to transfer to or from other points in Europe. Aer Lingus also offers a niche position connecting the 36m North Americans of Irish descent to their ancestral home (population 5.3m) as well as the rest of Europe.

North Atlantic traffic was very strong for all the major participants in 2023. IAG saw passenger numbers up by 23% year on year to 12.8m (11% of the total) and 1% higher than the numbers carried in 2019. Pent-up demand (and the absence of LHLCC Norwegian) ensured that unit revenues were strong even though premium business traffic remained soft. Latin America and Caribbean routes — a smaller market for the group, representing 6% of total passenger numbers — was up by 19% year on year, and 2% higher than in 2019.

IAG prides itself on having the largest metal-neutral immunised joint venture on routes to North America — what it calls its Atlantic Joint Business (AJB). Incorporating the IAG brands of BA, Iberia, Aer Lingus and Level, it includes the operations of fellow oneworld alliance members American and Finnair. In 2019 the AJB had a 34% share of the revenues on routes between Europe and the US (although since then much of the high yielding premium business traffic has disappeared) and 27% of total passengers (and in that year there was also meaningful competition from the now defunct Norwegian long haul operations out of the UK). It operates 29 non-stop routes to destinations in the US (and 60 when including connections), compared with 22 for the Lufthansa/United-led Star Alliance JV and 20 for that of SkyTeam’s Delta and Air France-KLM.

It sees strong future opportunities arising from the geographical location of its hubs to the West of Europe from new generation aircraft. The group has 14 A321XLR aircraft on order for delivery 2024-26 (and 14 options) currently destined for Iberia and Aer Lingus (but see below).

Airbus claims that the A321XLR has a maximum range of 4,700nm (8,700km). IAG seems not to trust that figure as achievable, and in its own presentations shows a maximum operational range of 3,500nm (the range of the A321neo). On the route map we have drawn contours showing the maximum range potential for using the XLR from Dublin and Madrid respectively (at a compromise 4,000nm — Airbus’s stated maximum range of the A321LR). These highlight that the aircraft could open up significant opportunities for narrowbody point to point services for much of the US landmass, as well (for Iberia from Madrid) to northern Brazil, which, under-represented in its current route network, it sees as a growth opportunity.

Limited exposure to Asia

Prepandemic the group’s exposure to Asia/Pacific routes was relatively small, accounting for only 2% of total passenger numbers. The Far East has taken a lot longer to reopen borders, and the war in Ukraine with the concomitant closure of Russian airspace to European and US carriers, has resulted in a significant diversion from great circle routings and uncompetitive increase in flight times. For the group in 2023, passenger traffic to the region more than trebled to 1.0m pax, but was still 58% below what it had been in 2019.

But, again, its sees a significant strength in the joint ventures it has in place to provide access to the region, all connected with members of the oneworld alliance.

With Finnair and JAL it operates the Siberian Joint Business on routes to Japan, even if at the moment they are unable to fly over Siberia — and Iberia recently restarted services to Tokyo. China Southern (in which American has a 5% stake) is its partner in the China Joint Business for services to the PRC.

But the most extensive JV results from the unique relationship with Qatar Airways — the Qatar Joint Business. This is an agreement that covers services involving destinations in 62 countries worldwide, heavily focused on routes transiting through or beyond Doha, from Hong Kong (Qatar Airways has a stake in Cathay) to Australia, New Zealand, South East Asia, the Middle East and Central Africa.

In December last year Iberia inaugurated daily flights to Doha, and BA recently increased services to thrice-daily from Heathrow (albeit a shadow of Qatar’s eight daily services to Heathrow). They have a long record of coordinating cargo services.

But then, Qatar Airways holds 25% of the equity in IAG. And the State of Qatar, through its Sovereign Wealth Fund, the Qatar Investment Authority, owns Qatar Airways and holds 20% of the equity in Heathrow, the jewel in the crown of IAG’s hubs, and could soon become the airport’s largest shareholder (see figure).

(At the end of last year Ferrovial announced that it had agreed to sell its remaining 25% stake in Heathrow to Saudi Arabia and private equity firm Ardian for £2.4bn (an EV/EBITDA valuation of 13.8x). Three other shareholders — GIC, USS and CDPQ — have decided to exercise their “tag-along” rights. There are many state-owned major airports in the world, but the UK must be unique in allowing its principal gateway infrastructure to be majority-owned by other states — in this case, if the deal goes through, the Qataris, Saudis and Chinese.)

Brand Results:
Spain takes the Crown

	British Airways (£m)		Iberia (€m)		Vueling (€m)		Aer Lingus (€m)		IAG Loyalty (£m)
	2023	v 2019	2023	v 2019	2023	v 2019	2023	v 2019	2023	v 2019
Passenger Revenue	12,668	6%	5,262	30%	3,181	31%	2,209	7%	837	n/a
Cargo Revenue	757	6%	275	-5%			55	2%
Other Revenue	898	32%	1,421	9%	17	-6%	10	-9%	455	n/a
Total Revenue	14,323	8%	6,958	23%	3,198	30%	2,274	7%	1,292	n/a
Costs	12,892	13%	6,018	17%	2,802	27%	2,049	11%	1,012	n/a
Operating result	1,431	-26%	940	89%	396	65%	225	-18%	280	+59%
Margin	10%	-6pts	14%	+1pt	12%	+3pts	10%	-4pts	22%	n/a
ASK(m)	167,694	-10%	75,726	3%	41,708	9%	31,572	4%
RPK(m)	140,137	-10%	66,024	3%	38,125	14%	25,451	3%
Load Factor	84%	0pts	87%	0pts	91%	5pts	81%	-1pts

Market dynamics in the Iberian peninsula gave Iberia and Vueling a particularly strong boost to profitability in 2023.

Iberia generated a 26% increase in total revenues to a record €7.0bn (with passenger revenues 30% higher than in 2019) on the back of a 10% increase in passenger unit revenues and an 18.5% growth in seat capacity (in ASKs). Unit costs appear to have fallen by 1%, producing operating profits of €940m — roughly equal to the sum of the operating losses in 2020 and 2021 combined — and nearly double the amount of operating profits reported in 2019. This represents a record operating profit margin for the airline of 13.5%.

Presenting at IAG’s Capital Markets Day in November last year, Iberia’s CEO, Fernando Candela, contrasted Iberia’s current condition with what it had been in 2012, a year after the creation of IAG. Then it had poor operational performance with only 74% of flights on time; poor industrial relations, strikes and an outdated product, it was rated a three-star airline in the SkyTrax rankings and generated a negative -2pp net promoter score; with an old fleet, high staff costs an inefficient structure it lost €350m at the operating level — a negative 7.3% margin.

In 2023 Iberia claims it was among the top three European carriers with the best on-time performance (at 87%); it had a “product adapted to the target demand space”, was ranked with four stars by SkyTrax and achieved a positive +30pp NPS; it had a competitive cost base with non-fuel unit costs down by 30% over the intervening 11 years (an annual average decline of 3.3% in current terms and 5% in real terms); and in 2023 it achieved the highest operating margin of the airlines within the IAG portfolio.

Vueling, the group’s LCC operation, also saw very strong revenue and profit performance. A 16% year on year increase in capacity combined with a four point improvement in load factor (to 91.4%) and an 11.4% improvement in unit revenues created a 23% growth in revenues to €3.2bn, (30% higher than 2019). Operating profits more than doubled to €396m (a margin of 12%), and were 65% higher than in 2019. Of note, it achieved ancilliary revenues of €27 per pax, 95% higher than in 2019. This suggests that ancillaries account for 30% of turnover up from 20% five years ago.

The LCC has achieved this performance despite some disruption. Intermittent strikes from the cabin crew from the end of 2022 were finally resolved in September 2023 with a mutually acceptable collective agreement.

The pilot’s collective agreement, signed in 2019, comes up for renewal this year. And the pilots are grumbling (it recently suffered a series of industrial action from its French-based pilots). IAG has clearly stated that it will not allocate more aircraft to the airline unless it can negotiate a “sustainable” agreement with the pilots.

The Anglo-Saxon airlines in the Group fared less well. Both British Airways and Aer Lingus experienced very strong year on year growth in traffic, unit revenues operating and net profits. For each, turnover was higher than levels achieved in 2019 by around 7-8%; but operating profits remained substantially below 2019 levels (by 26% at BA and by 18% at Aer Lingus). Both showed operating margins of 10%, well down from historic levels.

British Airways however needs to restore its brand reputation. During 2023 according to OAG it achieved an on-time performance of only 60%, ranking bottom among the 20 largest airlines (behind easyJet at 65%). During the year its NPS, according to Comparably, hovered around zero — although it has recovered to a positive 5pp during 2024 showing 42% promoters to 37% detractors (and 21% passives).

The company had a particularly tough year at its home base in 2022 when Heathrow Airport, unprepared for the bounce-back in traffic imposed limits on operations.

External events weighed heavily too in 2023: under-staffed security, border-control, ground and baggage handling; continuing supply-chain issues, a series of severe weather events (not that unusual); a notorious meltdown of the UK’s Air Traffic Control systems; and an above average level of industrial action.

However, BA identifies that only 25-30% of the delays were caused by external events, the majority down to its own incompetence.

At the November CMD, BA emphasised the management imperative to generate a transformation, mentioning its plans to invest over £7bn over the next two years focusing on providing:

• world-class customer experience,
• leading edge commercial platform,
• modernisation of the IT estate,
• operational and technical excellence.

Much of that stated investment is fleet related; but is does include £750m on bringing its computer and IT systems into the third decade of the 21st century, relaunching its “app” and digital presence, introducing a new revenue management system with dynamic pricing capability, and modernising its payment systems.

Aer Lingus is also under pressure. The carrier’s pilots had had their pay halved in 2020, but had been guaranteed there would be no redundancies. In January this year, its pilots rejected an 8.5% pay offer after the cabin crew had accepted a 12.5% pay increase. The pilot offer, through a tribunal award, had been reduced because in 2019 the union had accepted an “adjustment” in pay to provide more time off. They, like their counterparts at Vueling, are complaining. As with Vueling, IAG has stated that the company will not be allocated aircraft unless it can negotiate a “sustainable” agreement with the pilots. Time is running out: a decision on what colours to paint IAG’s first A321LR had to be made by the end of April, green or red?

One of the operating brands that does not disclose results separately is that of LEVEL. This is the Group’s experiment at long haul (and questionably medium haul) low cost operations. Operating currently under the Iberia AOC with six A330s, it is flagged to be a long haul operator based in Barcelona chasing “frugal fun” traffic to North and South America, closely linked to operations at Vueling (for feed?). Level is in the process of applying for its own AOC, and received an additional A330 this year and has plans to grow the fleet to 8 A330s over the next two years. With fewer than 1m pax it is the “baby” in the portfolio: its revenues, profits (or losses) are deemed “not to exceed the quantitative thresholds to be reportable”.

IAG started reporting financial results of its frequent flier programme IAG Loyalty (which runs Avios, IAG’s loyalty “currency”) as a separately disclosable business unit in 2020 — when it managed to exceed those quantitative thresholds.

In 2023 IAG Loyalty had revenues of £1.3bn (over 80% of which is generated externally), up by 53% on the prior year period, and operating profits of £280m, 17% higher than in 2022 (and 59% higher than 2019 when its £176m operating profit was deemed too immaterial to disclose). IAG heralds the results of IAG Loyalty as a key part of its corporate strategy to develop “capital-light earnings growth”, but does not provide much consistent information on the performance.

In a presentation at the Group’s 2023 CMD we are told that there are 40m card-carrying members, that membership had grown by 2m during the year, and that co-branded UK card spend was equivalent to 1% of UK GDP. In a more informative presentation at the equivalent event in 2019, we learnt there were then 34m members (of which 9m were “active” — ie those who had collected or redeemed Avios in the previous year); 51% of Avios were earned through everyday spending, and not through flying; and that £40bn was spent on collecting Avios each year.

Perhaps IAG is grooming the capital markets to develop a hunger to invest in its FFP — as the Group’s trans-Atlantic counterparts have done in the past four years — under the illusion that such a loyalty programme can be divorced from the aspirational goals it supplies its members, and the cash flow it generates can be separated from the airlines it serves. (For our views and analysis of the value of the FFP, see “Banking on the Frequent Flyer”, Aviation Strategy, Jul/Aug 2020).

		2023	vs 2022	vs 2019	% of total
by brand	British Airways	43.32	+30%	-9%	37%
	Iberia	24.04	+20%	+7%	21%
	Aer Lingus	10.74	+20%	-8%	9%
	Vueling	36.76	+15%	+6%	32%
	Level	0.70	+41%	-63%	1%
by region	Domestic (UK & Spain)	29.16	+14%	+3%	25%
	Europe	59.87	+23%	-4%	52%
	North America	12.81	+29%	+1%	11%
	Latin America/Caribbean	6.43	+19%	+2%	6%
	Africa/Middle East/S Asia	6.24	+34%	+1%	5%
	Asia Pacific	1.05	+259%	-58%	1%
	Group	115.56	+22%	-2%

Unique “Plug-and-Play” Business Model

IAG has a unique corporate model in the airline industry. When it was formed in 2011 it could learn from the mistakes that British Airways and Iberia identified in the structures created by the merger of Air France and KLM in 2004, and acquisitions by Lufthansa (of Swiss and Austrian) in subsequent years to form the Lufthansa Group.

It is based on an independent corporate parent company which owns a portfolio of branded airlines and a common integrated platform to service their respective operations. The parent company makes decision about capital allocations to its airlines based on strict return criteria and exerts influence across the group to maximise returns. (And it is currently using this structure as a stick-and-carrot approach to industrial relations at Aer Lingus and Vueling).

The parent company is also responsible for setting the long-term vision for the Group. Its independence from the operating companies it sees as allowing it “objective, flexible and rapid decision-making” and enabling it to “implement a cohesive long-term” strategy.

Each of the IAG airlines is a stand-alone profit centre, with an independent credit identity and its own management team and board of directors. As a result, each airline retains its own brand and individual cultural identity, focusing on meeting the needs of its target customers and differentiating itself from its competitors.

Somewhat sneakily perhaps, the Group got around the problems of cross-border ownership and related ownership and control requirements for International flag-carrier airlines, by establishing Trusts (or in the case of Iberia — because Spanish law doesn’t have the concept of a Trust as a legal corporate body — a corporate entity) that retain a majority of the equity shares and voting rights but a minority of the economic interest in the operating airline.

New airline acquisitions have simply “dropped-in” to the structure, allowing for the elimination of back-office duplication, and almost immediate synergies.

The management team in their presentations have often stated that “IAG was created to be a vehicle for airline consolidation”. What’s next?

Air Europa

The next possible airline operating company to join the IAG portfolio, is that of Air Europa — Spain’s third largest airline — but it has been five years since the first approach.

IAG first announced an agreed bid in November 2019 to acquire Air Europa from Spanish tourism group Globalia Corporación for €1bn in cash. What timing! With no flights and no tourists, both companies were fighting for survival during 2020.

The purchase price was renegotiated down to €500m in 2021, but that renewed bid fell by the wayside. Early in 2022 IAG provided Air Europa with a €100m loan which was then converted into a 20% equity stake in October of that year. Then in February 2023 it was announced that they had once again come to agreement. IAG would buy the remaining 80% of Air Europa for €400m, 25% of which would be in IAG shares.

It is not a large acquisition per se: in 2019 Air Europa carried 12m passengers on a fleet of 66 aircraft (now, post-pandemic, reduced to 52 formed of 737s and 787s) and generated a 5% operating margin on €2.1m revenues. But it has a good presence in the South American markets (and on routes not operated by Iberia) which accounted for nearly 20% of its capacity, and 7% of the traffic between Europe and Latin America.

The acquisition makes strategic sense. It would give the Group stronger presence in Madrid — pushing its share of the slots there from 51% to over 65% — and allow it to transform the hub operations. It would boost the group’s share on the South Atlantic to around 26% (from 19%).

However, it does raise competition concerns. Air Europa had only 2% of the international traffic to Spain, but 14% of the domestic market (Iberia and Vueling have c50%) and a 22% share of domestic routes into Madrid (although the high speed train account of over half of the total domestic passenger journeys to Madrid). And domestically there is significant overlap.

Since notifying the EU formally (again) at the end of 2023 of its intention to buy Air Europa, it has no doubt been doing some horse trading to find remedies that would be acceptable to the EU Commission — including the usual slot surrenders and, seemingly, paying other airlines to take over routes. It does not appear that the Commission is convinced; it has opened an “in-depth investigation” (in a rather bizarre stop-start fashion) and has formally sent IAG notification of its objections.

The Commission is concerned that the proposed transaction “may reduce competition on a certain number of...”:

• “... Spanish domestic routes, notably on routes where high speed trains do not provide an alternative, and on routes between peninsular Spain and the Balearic and Canary Islands. On such routes, IAG and Air Europa compete head-to-head. For a few of these routes, there will be no direct competition after the transaction. For other routes, competition appears limited and comes primarily from regional Spanish airlines and low-cost airlines, such as Ryanair.
• “... short-haul routes connecting Spain with countries in Europe and in the Middle East. On such routes, IAG and Air Europa compete or will compete head-to-head in the foreseeable future. Competition on such routes appears limited and comes primarily from low-cost carriers, such as Ryanair, who in many cases operate from more remote airports, or from the incumbent carrier of the destination country.
• “... long-haul routes connecting in particular Spain with North and South America. On such routes, IAG and its joint venture partners compete or will compete head-to-head with Air Europa. For some of these routes, there will be no direct competition after the transaction. For other routes, competition from other airlines appears limited and both parties have relatively high market shares.”

(For some reason, the Commission does not appear to consider that Ryanair, Europe’s largest airline, is a valid competitor.)

The Group has until the 10th of June to respond and propose remedies. The Commission has until the 15th July to make a decision.

IAG, at its full year results, was still anticipating (perhaps optimistically) that the acquisition would close by the end of the year.

Whether or not it is successful with Air Europa, it could still join the fight for TAP Air Portugal, slated for privatisation (again) — see Aviation Strategy, May 2022. But, with a Competition Authority seemingly less in favour of airline consolidation than it has been in the past, that too may be an uphill struggle.