International Consolidated Airlines Group SA

International Consolidated Airlines Group SA (LON: IAG) is one of the world’s largest airline group, headquartered in London, United Kingdom. The group has 573 aircraft carrying around 113 million passengers to 268 destinations each year. The company shares traded in the Spanish Stock Exchanges and London Stock Exchange.

Recent News
On 9^th January 2020, the company announced the IAG traffic and capacity statistics for December 2019. The total passengers carried were increased by 5.5% in December 2019 to 8,747 thousand as compared with the corresponding period of the last year. The company capacity measured in available seat kilometres for December 2019 surged by 2% against the same period last year. British Airways reached a final contract in December 2019 on pay talks with its pilots’ union Iberia and BALPA and announced that it had signed a collective preliminary contract with its ground handling, maintenance and administrative staff unions. With China Southern Airlines, British Airways also signed a joint business contract on 17 December 2019. 

On the above same date,the company announced that the Chief Executive, Willie Walsh, had decided to retire on 30 June 2020.

Financial Highlights (for the nine months to September 30, 2019, €million)

(Source: Third Quarter Results, Company Website)

For the nine months of the financial year 2019, the company’s total statutory revenue grew by 5.7 per cent to €19,399 millionas compared to €18,346 million for the same period of the last year due to the steady growth of both passenger revenue and other revenue. Statutory operating profit (before exceptional items) declined by 9 per cent in comparison with the last year data mainly due to an increase in the operating and administrative expenses for the period. Statutory Operating profit (after exceptional items) declined from €3,159 million in nine months FY2018 to €2,520 million in nine months FY2019. Adjusted earnings per share fell by 1.4 per cent to 88.7 eurocents in 9M FY19as compared with the corresponding period of the last year.

On 30 September 2019, the cash was €7,838 million, and net debt to EBITDA stood at 1.2 times,and it was in line with 2018. The net debt reduced by 3.9 per cent to €6,179 million in nine months FY2019against the same period in 2018. Interim dividend per share was 14.5 eurocents.

Share Price Performance

Daily Chart as at January-13-20, before the market closed (Source: Thomson Reuters)

On 13th January 2020, International Consolidated Airlines Group SA shares were trading at GBX 662.20 at the time of writing before the market close (at 2:00 PM GMT), down by 0.27% against the previous day closing price. Stock's 52 weeks High and Low are GBX 669.40/GBX 411.50. The company's stock beta stood at 0.71, reflecting the lower volatility as compared to the benchmark index.

Conclusion
At existing fuel prices and exchange rates, the company anticipates its full-year 2019 operating profit will decrease to €215 million (before exceptional items)against the 2018 pro forma of €3,485 million. Passenger unit revenue is anticipated to marginally decrease at constant currency and non-fuel unit costs are anticipated to enhance at constant currency.

During the third quarter of the financial year 2019, the company has delivered mixed financial performance.Industrial action by pilots' union BALPA (British Airline Pilots’ Association) and other disruption containing threatened strikes by Heathrow airport employees impacted the business performance of the company. Further, the fuel bill surged by Euro 136 million in the current period. With China Southern Airlines, British Airways signed a joint business contract. This will benefit clients by adding more destinations between China and the UK with a greater choice of flights and improved frequent flyer benefits. The group has consistently delivered a ROE above 20 per cent for the last five years, which is a robust fundamental indicator and shows management efficiency. The company provide an opportunity to invest for the long term.

Based on the above rationale, we have given a "Hold" recommendation at the current price of GBX 662.2 (as on 13^th January 2020, before the market close).
 

Easyjet PLC

Luton, the United Kingdom-based EasyJet PLC (LON: EZJ) is a low-cost European point-to-point airline company. The company has four geographic segments, which are differentiated according to the origin country. The segments include the United Kingdom, Southern Europe, Northern Europe and Other.

On 21^st January 2020, the company will announce Q1 FY2020 results.

Financial Highlights (for the year ending 30 September 2019, £ million)

(Source: Annual Report, Company Website)

For the year ending 30 September 2019, the passenger numbers surged by 8.6% to 96.1 million.In FY2019, the capacity rose by 10.3%, driven by an increase in all regions. Load factor declined by 1.4 ppts to 91.5% in FY19. The total revenue for the financial year 2019 surged by 8.3% to £6,385 million, driven by an increase in capacity, while revenue per seat reduced by 1.8% to £60.81 against the previous year period. Headline basic earnings per share decreased by 25% to 88.7 pence as compared to 118.3 pence in FY18, while basic total EPS decreased to 88.6 pence. On a constant currency basis, the headline cost per seat reduced by 0.8 per cent to £43.11 (excluding fuel). For the financial year 2019, the headline ROCE reduced to 11.4%. On a like?for?like accounting basis, headline ROCE for the financial year declined to 9.9%. The company proposed a dividend per share of 43.9 pence, a decrease from the previous year period (FY18: 58.6 pence). The company’s dividend policy is to pay shareholders 50 per cent of headline earnings after tax, reflecting the Board’s confidence in the long-term prospects of the business.

Share Price Performance

Daily Chart as at January-13-20, before the market closed (Source: Thomson Reuters)

On 13th January 2020, Easyjet PLC shares were trading at GBX 1,495.50 at the time of writing before the market close (at 2:55 PM GMT), down by 0.23% against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,557.50/GBX 840. The company's stock beta stood at 0.57, reflecting the lower volatility as compared to the benchmark index.

Valuation Methodology


Conclusion
From the perspective of the market, the aviation industry has been disturbed by several geopolitical events in the current year, such as extreme weather and terror attacks events. For the airline industry, environmental factors impact the operating parameters and passenger demand. In Europe, the Air Traffic Control environment has continued to worsen.

In the year ending 30 September 2020, the company’s expected capacity growth will be at the lower end of the historic guidance in the range of 3%-8% per year.On a constant currency basis, the headline airline revenue per seat is expected to be up by low to mid-single digits in the first half of 2020, while headline airline cost per seat, excluding fuel, is expected to be up by low single digits in the financial year 2020.

The capital expenditure is anticipated to be approximately £1,350 million in FY20.The company might be exposed to foreign exchange rate movements, mainly Sterling against the Euro and the US dollar. The company is facing emerging headwinds and cost pressures. Currently, the stock is trading near the 52-week high, suggesting that the upside potential might be limited.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 1,499 (as on 10^th January 2020), while we look for any upcoming catalysts in the near term.

 
*All forecasted figures and peer information have been taken from Thomson Reuters.

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