IAG share price: Weak pound weighs on Q2 performance

International Consolidated Airlines Group (LON:IAG) has updated investors on its second-quarter and half-year performance this morning.

**Highlights from the company statement:**
Willie Walsh, IAG Chief Executive Officer, said:

“We’re reporting another strong performance in quarter 2 with an operating profit of €555 million before exceptional items which is up from €530 million compared to last year. Excluding Aer Lingus it would be €487 million.

“Our performance this quarter saw a negative currency impact of €148 million, primarily due to the weak pound. Numerous external factors affected our airlines including the impact of terrorism, uncertainty around the UK’s EU referendum and Spain’s political situation and increased weakness in Latin American economies. This led to a softer than expected trading environment, especially in June. In addition, the airlines’ operations have been considerably disrupted by 22 air traffic control strikes in Europe so far this year. This has impacted our passenger revenues.

“Our non-fuel unit costs fell 1.1 per cent but are up 0.8 per cent at constant currency, following the significant cost reductions achieved last year.

“In spite of the vast majority of our planned capital expenditure this year occurring in the first half, cash was €705 million higher than at the end of 2015.

“In the half year, we made an operating profit of €710 million before exceptional items compared to €555 million in 2015. Excluding Aer Lingus it was €668 million.”

Trading outlook

We have continued to experience a weaker trading environment in our UK point-of-sale business, which represents around one third of total revenue. On top of this, continued pound sterling weakness would reduce pound sterling profits when translated into euros in what is traditionally the most profitable part of the year.
In addition, like other European airlines, our operations around Europe have recently suffered from significant weather and Air Traffic Control strike disruption, resulting in over a thousand flights having to be cancelled. We expect at least €80 million disruption costs to be booked in the second half of the year as a result, with the additional risk of revenue dilution. This will affect Vueling more than other operating companies, as IAG’s short haul operations have had to bear the bulk of the disruption.
We continue to intensify our long-established cost control and capacity discipline. Cost initiatives currently in the planning stage will benefit our earnings from 2017. However, we also expect reductions in underlying non-fuel unit cost of around 1 per cent at constant currency in 2016 (the same as our previous guidance). This is on top of very significant fuel cost reductions as our historic hedges unwind. We have reduced our planned capacity growth for the second half of the year, and have 2017 capacity growth and capex under review.

Although visibility of revenue trends for quarter 4 remains low, we already have 74 per cent of our expected revenue booked for quarter 3. Based on current fuel price and currency levels, and given our high visibility over H2 cost reductions, we expect low double digit percentage growth in pre-exceptional operating profit in 2016.
We expect full year equity free cash flow to be within our long-term €1.5 billion to €2.5 billion range. This provides a high degree of coverage for ongoing ordinary dividends.
**More to follow…**
As of 07:13 BST, Friday, 29 July, International Consolidated Airlines Grp share price is 409.30p.