International Airlines Group (IAG) and Lufthansa reached (04-Nov-2011) an agreement in principle for the sale of British Midland Ltd (BMI) to IAG. The sale and closing of the deal remain subject to conditions including a binding purchase agreement, further due diligence and regulatory clearances. It is envisaged that the purchase agreement will be signed in the coming weeks and the aim is for the transaction to be completed in 1Q2012. [more - original PR][more - CAPA Analysis]
IAG and Lufthansa agreement in principle on BMI
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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.
Lufthansa still Number 2 vs IAG & Air France-KLM. Soft RASK justifies more ASK trimming for all
Lufthansa Group's detailed 2Q2016 results confirmed the headline numbers that it pre-released with a profit warning on 20-Jul-2016. After increasing its operating profit in 1Q, the group suffered a decline in 2Q. Among Europe's big three legacy airline groups, Lufthansa was the only one to report lower 2Q profits. In 1H2016, IAG again has the best operating margin of the three, followed by Lufthansa and then Air France-KLM. However, LCCs Ryanair and Wizz Air are more profitable than any of them.
Lufthansa's full 2Q report provides an opportunity to compare the capacity growth and unit revenue performance of each of the Lufthansa Group, Air France-KLM and IAG for 2Q2016. Unit revenue has been soft for some time for all three, but seems to be weakening further. Lufthansa cautioned that advance bookings, especially on long-haul, have declined significantly, citing repeated terrorist attacks in Europe and greater political and economic uncertainty.
Against this backdrop, IAG and Lufthansa have reduced their capacity growth plans, while Air France-KLM has retained its 1% ASK growth outlook for its network airlines. CAPA's analysis highlights the inverse relationship between capacity growth and RASK growth. Further capacity haircuts may follow.