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IAG lowers plans for capacity growth, fleet investment & profit, but keeps return on capital target
IAG's Capital Markets Day on 4-Nov-2016 was the first since its formation in 2011 when it lowered any of its medium term financial targets. It cut its 2016-2020 average EBITDAR goal, in spite of adding in Aer Lingus for the first time. This followed two cuts to 2016 operating profit guidance during the course of this year, as a result of "a tough operating environment". It has been hit by adverse currency movements, mainly resulting from the UK's Brexit vote, in addition to ATC strikes and terrorist events.
To its credit, IAG has responded to the more challenging trading conditions by lowering its planned capacity growth and capital expenditure during its 2016-2020 strategic plan. These steps are necessary if it is to have a chance of meeting its ambitious goal to sustain a 15% return on invested capital. This target is unchanged, despite the lower profit outlook.
In 3Q2016, IAG's rolling four quarter return on capital fell, after rising more or less continuously since it began to target this measure in 2013. It has consistently been more profitable than either of its two main European legacy airline group rivals (Air France-KLM and Lufthansa). Nevertheless, the downward step highlights the challenge in meeting its own demanding target.
Flybe: largest regional airline in Europe leads the airline capacity growth charge in winter 2016/17
The surprise departure of Flybe CEO Saad Hammad on 26-Oct-2016 "by mutual agreement" raises questions about the future strategic direction of Europe's largest regional airline. Mr Hammad joined in Aug-2013 and implemented a restructuring programme, returning Flybe to profit in FY2016 (March year end).
Capacity reduction during the restructuring has been followed by a period of accelerating growth. So much so that Flybe is Europe's fastest-growing airline group among the top 20 in Europe by seat numbers this winter, with an increase of 19%. CAPA has identified 45 new Flybe routes in calendar 2016 (compared with a late summer total of 165), on the majority of which Flybe has no airline competitor.
Despite low competition on its network, Flybe's FY2016 operating margin was one of the lowest among listed European airlines and coincided with weakening unit revenue. Pricing has softened further, not least due to uncertainties such as Brexit, just as Flybe's capacity growth has accelerated.
Until a replacement for Mr Hammad is found, Flybe's Chairman Simon Laffin will assume executive responsibility. Significant strategic change may be unlikely in the interim, but a key question for the next CEO will be whether to continue with such aggressive capacity growth in the face of falling fares.