British Airways Parent IAG Upgrades Earnings Guidance
November 06 2015 - 05:40AM
Dow Jones News
LONDON—British Airways parent IAG is preparing to fly into
uncharted territory of higher profits and increased cash flow,
mirroring the successes U.S. carriers such as Delta Air Lines have
had in minting big rewards through drastic restructuring.
International Consolidated Airlines Group SA, as IAG is formally
known, on Friday raised its outlook for average annual earnings per
share growth to more than 12%, from above 10% previously, for the
2016 to 2020 period. The operating profit margin outlook has been
lifted to a range of 12% to 15%, up from 10% to 14%.
It also reshuffled executives that will be responsible for
delivering those returns. In April, Alex Cruz, 49, the current head
of IAG's budget unit Vueling, will take over as chief executive of
British Airways, the biggest contributor to IAG's profit. Keith
Williams, who has run the airline since taking over in 2011 and was
previously its chief financial officer, will retire.
"The challenge at British Airways is to continue providing
excellent customer service while ensuring that we meet the
financial targets that IAG sets for us," Mr. Cruz said.
Former pilot and IAG Chief Executive Willie Walsh has been
aggressively remaking the airline group since its creation in 2011
through a merger of Spain's Iberia with British Airways, which he
ran at the time. He pushed through cost reductions at the Spanish
carrier, including thousands of job cuts, to restore the airline to
profitability. IAG also has added budget carrier Vueling to its
stable of airlines and this year bought Aer Lingus, a carrier Mr.
Walsh ran before British Airways.
Mr. Walsh has said IAG would only invest in those units that can
deliver profits. The group this week bought more long-haul planes
for Iberia to fuel growth and is adding Airbus A330 widebody jets
for newly acquired Aer Lingus to enable its expansion of flights to
the U.S. It previously made jetliner purchases to bolster British
Airways and Vueling.
Synergy savings at the airline group should reach €800 million
($870 million), said IAG's Chief Financial Officer Enrique Dupuy,
or about double the original target.
IAG last week said it expects a record operating profit of €2.25
billion to €2.3 billion as it benefits from merger benefits, cost
reductions, and lower fuel costs. Those factors also are driving
record returns at Delta Air Lines and IAG's close trans-Atlantic
partner American Airlines Group Inc.
"When we merged British Airways and Iberia five years ago we had
a vision of a group of airlines not just to be a major player but
to really be an industry leader and I think what we have done in
the five years is exactly in that direction," IAG Chairman Antonio
Vá zquez Romero told investors on Friday. "We have set a strong
foundation for the future," he said.
IAG's improving fortunes also promise to further separate the
airline group from its nearest rivals, Air France-KLM SA, Europe's
largest airline by traffic, and No. 2 Deutsche Lufthansa AG.
Both of the continental airline groups have also enjoyed rising
profits this year, heavily driven by a sharp drop in fuel costs.
They have struggled to implement restructuring amid fierce
opposition from labor groups
Lufthansa cabin crew on Friday announced renewed strike plans.
Labor unrest also is hampering Air France, where some employees
physically assaulted management last month over job cut plans.
IAG's new profit outlook is promising investors healthy returns
even without the big fuel boost that has aided results this year
and should do so again in 2016.
IAG said it now targets a sustainable return on invested capital
of 15% compared with a previous projection of 12% for the five-year
period starting in 2016. Equity free-cash flow targets for the
period through the end of the decade is now set at €1.5 billion to
€2.5 billion per annum, versus €1 billion to €1.5 billion per annum
previously, it said.
The airline group, which is investing heavily in new planes
including Boeing 787 Dreamliners and Airbus A350 long-range jets,
also narrowed its capital cost band to average less than €2.5
billion a year, from a range of €2 billion to €3 billion.
IAG also said it was moving Nick Swift from running its cargo
operations, to serve as British Airways' CFO. Replacements for Mr.
Swift and Mr. Cruz at Vueling will be named later.
Razak Musah Baba contributed to this article.
Write to Robert Wall at robert.wall@wsj.com
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(END) Dow Jones Newswires
November 06, 2015 05:25 ET (10:25 GMT)
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