UK’s Office of Fair Trading (OFT) announced (05-Mar-2012) it decided against reviewing International Airlines Group’s (IAG) takeover of bmi from Lufthansa. The takeover is still to be approved by the European Commission which is to announce its decision by 16-Mar-2012. Virgin Atlantic has expressed its opposition against the takeover, claiming it will lead to reduced services and higher fares for passengers travelling within the UK. The OFT stated the European Commission “is best placed” to review the agreement. [more - original PR]
UK OFT will not review IAG takeover of 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.
Air France-KLM, Lufthansa & IAG: 3Q2016 results may signal a cyclical peak in Europe airline margins
Air France-KLM, Lufthansa Group and IAG collectively reported a fall in operating profit and operating margin in 3Q2016, after growth in 1H2016. Individually, only IAG avoided a decline in its operating margin. IAG also remained the most profitable, and Air France-KLM the least profitable, in the most important quarter of the year.
The margin contraction in 3Q resulted from a bigger fall in unit revenue relative to 1H, without a matching fall in unit cost (in spite of lower fuel prices). Passenger unit revenue fell by 6% to 7% for all three (adjusted for currency movements), with long haul markets especially weak. Unit revenue was particularly soft on routes to Asia Pacific and on the North Atlantic (and, for Lufthansa Group) on the South Atlantic.
The combined operating margin of the three has been a good indicator for European airlines overall in the past. The outlook for FY2016 for each still suggests that there will be margin improvement for the year as a whole. This could be in line with, or slightly above, the cyclical peak reached in 2007 – before the global financial crisis. Against this backdrop, the decline in margin in 3Q2016 suggests that further improvement may be difficult in 2017.