IAG Group: Vueling is stalling, but Aer Lingus helps to grow 2Q profits. 2016 outlook lowered

IAG increased its 2Q2016 operating profit modestly, but only because Aer Lingus boosted this year's numbers (it was not in the group in 2Q2015). The quarter was affected by externalities: negative currency impacts and softer demand conditions resulting from terrorism, the Brexit vote, macroeconomic weakness in Latin America and air traffic control strikes in Europe. The resultant deteriorating unit revenue trend was offset by lower unit costs, mainly due to lower fuel prices.

Three of IAG's four operating airlines improved their margin in 1H2016 but Vueling's declined, since the external disruption affected it the most. Vueling's operating margin has been on a downward trend since its acquisition by IAG in 2013. Its capacity growth plans for FY2016 have now been trimmed, also scaling back the group's growth for the year.

IAG now expects 2016 operating profit growth of a low single-digit percentage, much less than the 40% increase previously anticipated but still an increase. This outlook is more positive than that given recently by Lufthansa, which expects a fall in profit this year. Moreover, IAG remains a higher margin group than either of Lufthansa or Air France-KLM, and should be better placed if there is to be a full-scale downturn.