British Airways Parent IAG Cuts Earnings Outlook -- Update

By Robert Wall

LONDON-- British Airways parent International Consolidated Airlines Group SA Friday cut its earnings outlook further after third-quarter operating profit fell 3.6%, weighed down by the sharp drop in sterling after the U.K. voted to leave the European Union.

Operating profit for the crucial July through September period was 1.21 billion euros ($1.32 billion), compared with EUR1.25 billion in the year-earlier quarter. The figure strips out some nonoperating costs and taxes and in this year's third quarter reflected a EUR162 million currency headwind.

IAG shares, down about 30% for the year after the Brexit vote and sterling's fall, were up 4.2% in midmorning trade on Friday amid signs that downward pressure on ticket prices from overcapacity among European airlines is starting to moderate.

Declines in unit revenue are easing and may be near to bottoming out, IAG Chief Financial Officer Enrique Dupuy told analysts.

To help ease overcapacity, IAG has repeatedly cut growth in seats-for-sale throughout the year and again in the last quarter. It now expects capacity to advance 9.5%, boosted by the addition of Aer Lingus, compared with a 10.5% increase forecast at the outset of the year. Mr. Dupuy said "this is something we are going to be continuing."

Net profit rose 9.9% to EUR930 million from EUR848 million. Sales in the period declined 4% to EUR6.5 billion.

The currency impact was "significant" though, IAG Chief Executive Willie Walsh said.

IAG reports earnings in euros, but its British Airways unit that generates most profit principally sells tickets in pounds which are now worth less.

The airline group, which also includes Aer Lingus and Spanish carriers Iberia and Vueling, cut its profit outlook for the year following the referendum. The pound has depreciated further since then against the dollar and the euro. Mr. Walsh said the guidance in July was based on the prevailing exchange rates now changed.

IAG Friday said it would deliver a full-year operating profit of EUR2.5 billion. It had already revised its outlook down to low double-digit growth in its adjusted operating profit beyond the EUR2.3 billion generated in 2015. IAG began the year expecting to deliver an operating profit of about EUR3.2 billion

European airlines have faced a multitude of headwinds weighing on earnings. Ticket prices are plummeting because of overcapacity, terror attacks have spooked passengers and repeated air-traffic-control strikes have led to thousands of flight cancellations.

Mr. Walsh said trading conditions said the business conditions were "tough," with low growth in Europe and weakness in markets such as Brazil. Conditions are worse than expected a year ago, he said, and had not improved since the Brexit vote.

The impact from air-traffic control strikes this year has been more pronounced than in prior years, he added.

Britain's June 23 vote to leave the EU has led the country's currency fall to more than 30-year lows. IAG isn't the only airline to suffer. Ryanair Holdings PLC, Europe's biggest discount airline, in October said its profit in the fiscal year ending March 31, 2017, would advance more slowly than expected because of the currency headwind.

Mr. Walsh, an Irishman who said he personally had opposed Britain leaving the EU, kept the carrier from joining others in lobbying to retain membership in the trade bloc, arguing an exit wouldn't materially impact the airline.

British Airways may raise ticket prices to offset sterling's weakness, Mr. Walsh said. However, he added that the currency weakness also have given the carrier a competitive edge on the important trans-Atlantic market because many of its costs have effectively fallen compared with U.S. rivals.

Britons were still traveling abroad for vacations, Mr. Walsh said, though trip lengths are shorter.

Even before the Brexit vote, Mr. Walsh had signaled IAG would work hard this year to improve BA's competitiveness. The company announced a first EUR62 million restructuring charge for the airline, with more planned.

IAG on Thursday said it would pay an interim dividend of EUR0.11 per share, a 10% increase over the prior-year period, which it expects to be about half of the full-year payout.

IAG also said British Airways agreed with pension trustees a technical deficit of GBP2.8 billion ($3.4 billion), only slightly higher than the early projection. Annual payments are little changed.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

October 28, 2016 06:16 ET (10:16 GMT)

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