August 2, 2019 / 12:54 PM / 3 months ago

Breakingviews - Brexit casts a double cloud over IAG

British Airways logos are seen on tail fins at Heathrow Airport in west London, Britain, February 23, 2018.

LONDON (Reuters Breakingviews) - British Airways owner IAG is remarkably unscathed by Europe’s airline price war. Unfortunately for chief pilot Willie Walsh, fears of a messy Brexit mean shareholders aren’t giving him the credit. There’s little he can do about IAG’s exposure to the UK economy. But some straighter talk about the group’s complicated post-Brexit ownership plans would help.

IAG’s second-quarter results, released on Friday, stood in stark and happy contrast to the recent slew of European airline earnings. Operating profit in the three months to June, the first bit of the all-import summer season, rose 6% to a forecast-beating 960 million euros, while overall revenue per customer was up 1.1%. Compare that with German rival Lufthansa, which has issued two profit warnings this year and this week fessed up to a 70% drop in quarterly net profit.

Walsh’s rosy outlook contributed to a 3% jump in IAG’s shares on Friday morning. But that does little to change the 8 billion pound group’s dismal valuation. Trading at 3.9 times consensus forecast earnings per share for the next 12 months, according to Refinitiv data, IAG is now flying at a lower altitude than Lufthansa and perennial laggard Air France-KLM for the first time in five years. It’s a reflection of the carrier’s outsize exposure to the risk that UK Prime Minister Boris Johnson crashes Britain out of the European Union in October.

Walsh can’t do much about IAG’s dependence on UK flyers, whose appetite for international travel would be diminished by an economic downturn and weaker pound. British Airways dominates the group, which also includes Ireland’s Aer Lingus and Spain’s Iberia, and brought in more than 60% of its nearly 12 billion euros of first-half revenue.

But shareholders are also worried about IAG’s ability to meet the EU’s obligation that more than half of airline shareholders come from the bloc after Britain leaves. On Friday the airline said Spanish, Irish and Austrian regulators had given the thumbs up to its undisclosed local ownership and control plans. That’s an improvement on Walsh’s previous invocation of a “magic” solution. But given that, in extremis, the rules could mean a forced sale by UK shareholders or a breakup of IAG, the more clarity and information the better. For the normally garrulous Irishman, more soothing words could reap big returns.

Breakingviews

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