British Airways owner IAG slashes profit forecast and cuts targets, blaming Brexit

Willie Walsh, IAG chief executive, warned that the group wouldn’t meet targets because economic uncertainty puts people off travel

Benajamin Katz
Friday 29 July 2016 09:30
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British Airways says it will be hit by less people travelling and a weaker pound
British Airways says it will be hit by less people travelling and a weaker pound

British Airways parent IAG radically lowered its earnings target for 2016 and said it will cut capacity and put spending under review in the wake of the UK’s decision last month to quit the European Union.

Operating profit is now expected to grow by a low double-digit percentage, down from the 70 per cent increase anticipated prior to the June 23 Brexit vote, the London-based company said Friday.

Willie Walsh, IAG chief executive, warned a day after the poll that the group wouldn’t meet the earlier target as economic uncertainty after the “Leave” victory puts people off travel.

The weaker pound also means UK receipts will be worth less when translated into euros, in which the group reports.

“In the lead up to the vote we witnessed softer than expected trading, principally with UK corporates,” Walsh said on a conference call. “Had the vote gone the other way we would have expected that to bounce back. Clearly that didn’t happen and that trend has continued.”

Walsh predicted a recovery “at some point,” while suggesting it’s too early to say whether that will come later this year or early in 2017.

Capacity gains for the whole of 2016 will now be reduced to 4.5 per cent, down one per centage point, with all of IAG’s constituent airlines likely to be affected, he said.

Shares of IAG fell as much as 2.8 per cent and were trading 2.2 per cent lower at 400.7p. The stock has lost about one-quarter of its value since the referendum.

Operating profit in the second quarter, which ended a week after the EU poll, increased to £467 million from £446 million a year earlier, boosted by lower fuel costs and the purchase of Irish carrier Aer Lingus. Analysts had predicted earnings of £478 million.

Even during that period, the impact of currency fluctuations wiped £125 million from earnings after the pound fell in the run up to the vote. Walsh said Sterling’s weakness is likely to continue impacting results into next year.

Earnings in the second half may also be crimped by the impact of a spree of terrorist attacks in mainland Europe, while air traffic control strikes, disrupting the Vueling unit in particular, will have an £67 million impact.

At the same time, the weak pound could have some positive effects by helping to encourage tourist visits to the UK

IAG — as International Consolidated Airlines Group SA is known — was formed from a merger of BA and Spain’s Iberia before purchasing British Midland, Barcelona-based Vueling and Aer Lingus.

With the group registered in Spain, an EU rule limiting outside ownership of the bloc’s carriers to 49 per cent could compromise that structure once the Brexit is implemented.

© Bloomberg

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