IAG's Focus On Costs As Competition Intensifies

July 31, 2015

IAG reported a 40 percent rise in second-quarter operating profits to EUR€530 million.

The increase from the previous year's EUR€380 million was helped by lower fuel costs. Revenue for the quarter was up 11 percent at EUR€5.656 billion.

Half yearly operating profit increased 141 percent from EUR€230 million to EUR€555 million.

IAG said it will continue to focus on driving down costs as competition intensifies both within Europe and as rivals put on more capacity on transatlantic routes.

The group, which is buying Aer Lingus to add to a portfolio comprising British Airways, Iberia and Vueling, said its unit revenue was down 6.6 percent on a constant currency basis in the three months ended June 30.

PRICE COMPETITION

Within Europe airlines are bracing themselves to compete with Ryanair, Europe's biggest short-haul airline by passenger numbers, which has said it expects to cut fares this winter as a result of lower fuel prices, heaping pressure on airlines with higher cost bases.

"We continue to take cost out of the business, with both employee and supplier unit costs down at constant currency, and improvements in productivity levels," chief executive Willie Walsh said in a results statement.

As part of its focus on costs, Walsh said that IAG opposed a plan to build an additional runway at London's Heathrow Airport, where British Airways is the biggest airline, because the associated costs were "outrageous".

"From an IAG point of view we will not be supporting it. We're not going to support something that increases our costs," Walsh told reporters.

The airport is operating at full capacity and wants to build a third runway but faces significant political challenges to do so. An expanded airport would in part be paid for by levying higher user charges on airlines.

TRANSATLANTIC EXPANSION

Buying Aer Lingus is part of IAG's plan to be able to add more lucrative transatlantic routes without needing more runway space at Heathrow, because it will provide the group with slots at Dublin Airport to use as a new hub.

IAG on Friday declared its EUR€1.3 billion bid for Aer Lingus unconditional as to acceptances, after it waived a condition. But the group is still waiting for Ryanair to formally accept its bid, another condition of the deal.

Ryanair has said it will do so in mid-August.

For 2015 IAG reiterated its forecast, last upgraded in February, for operating profits to be in excess of EUR€2.2 billion, up from the EUR€1.39 billion made in 2014.

(Reuters)