Fuel costs hammer IAG

Soaring fuel costs contributed to a larger than expected first quarter loss at International Consolidated Airlines Group (IAG), the airline formed by the merger of British Airways and Iberia.

The airline reported an operating loss of €249m in the first quarter, an outcome worse than the €230m loss the market had been expecting. In the corresponding quarter of 2011 the airline had lost €102m.

Loss before tax for the quarter was €263m, versus a €47m loss the year before.

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Revenue for the quarter was up 7.8% to €3,919m (2011: €3,636 million), including €40m or 1.1% of favourable currency impact. Passenger revenue climbed 9.0% to €3,290m from €3,018m in the first quarter of 2011.

Fuel costs for the quarter rose an eye-watering 24.9% to €1,409m from €1,128m the year before, while fuel unit costs were up 24.0%.

At the current oil price and euro/US dollar exchange rates, IAG would face a fuel cost increase this year of over €1bn, though the year-over-year impact of this should be less severe in the second half of the year.

Non-fuel costs before exceptional items for the quarter were up 5.7% at €2,759m, including €32m or 1.2% of adverse currency impact. Non-fuel unit costs were up 5.1%, or 3.7% on a constant currency basis.

While the group has been hammered by rising fuel costs, its Iberia division has also been affected by a long-running industrial dispute with a pilots union, which cost the group €25m in the quarter.

Meanwhile, following the recent acquisition of bmi, consultation continues with mainline staff and their trade unions about plans to integrate the business into British Airways.

Cash of €3,574m at the end of March was down €161m from the end of 2011, while group net debt was down €19m in the quarter to €1,129m.

"Iberia's overall operating loss for the quarter was €170m (2011: €100m operating loss) and British Airways' operating loss was £62m before exceptional items (2011: £5m operating loss)," revealed IAG Chief Executive, Willie Walsh.

"Iberia's performance reflects the weakness of the Spanish domestic market and industrial action by pilots opposed to actions by Iberia's management to improve the airline's efficiencies. For British Airways, although the London market and demand for transatlantic travel remains strong, its performance has been affected by rising fuel costs," Walsh said.

Looking ahead, the group said the outlook for 2012 is uncertain, although demand in London remains strong, with the group continuing to see encouraging trends in its long-haul premium routes, particularly on the North Atlantic runs.

Countering this, the Spanish and wider Eurozone macro-economic background took a turn for a worse in the first quarter, which has had a negative impact on the group's operations at its Madrid hub.

Regarding the pilots' strike in Spain, which continued into the second quarter of the year, this has now been called off, but IAG said it would take some while for revenues to recover and the performance of the Spanish markets remains unclear at this stage.

The operating profit dilution from the acquisition and integration of bmi, completed during the second quarter, is expected to be in the order of €240m in the first year of ownership. This includes non-recurring restructuring costs to be booked this year of around €90m.

A trading statement these days from an airline would not be complete, it seems, without a complaint about the attitudes of governments to the industry, and the far from shy and retiring Willie Walsh did not disappoint, saying: "The financial performance of our business continues to be undermined by government actions. In addition to the UK government increasing the world's highest aviation tax - Air Passenger Duty - by double the inflation rate, the Spanish government plans to increase departure taxes from Spain by up to 10 euros per passenger."

Despite what Walsh regards as unhelpful government policies, passenger unit revenue for the first quarter was up 8.5%, or 7.3% on a constant currency basis, from a year earlier.

JH