Following years of extensive restructuring and expansion into the fast-growing budget market, I am convinced that International Consolidated Airlines Group (LSE: IAG) has what it takes to deliver exceptional shareholder returns long into the future.
The British Airways and Iberia owner made its first serious statement over the huge potential of the low-cost airline segment more than five years ago when it agreed to take over Spanish operator Vueling. And despite concerns over rising competition in the cheap ticket arena, it has continued to bulk up its presence here in recent years.
It successfully acquired Irish flyer Aer Lingus in 2015, and launched its LEVEL brand last year in a bid to offer cut-price trips between Europe and the Americas, seen as the next exciting frontier for the budget segment. And IAG is not done yet, the FTSE 100 business having two offers to buy fellow transatlantic traveller Norwegian Air rejected in recent weeks, after buying a 4.6% stake in the Scandinavian operator in April. Another approach would appear to be only a matter of time.
Profits bounding higher
The fruits of IAG’s expansion programme continue to be illustrated by the company’s blistering financial updates. Indeed, the latest market statement earlier this month has helped its share price barge through the 700p barrier for the first time in recent sessions.
The airline reported that pre-tax profits blasted to €246m between January and March from €93m a year earlier, with passenger revenues having jumped to €4.42bn from €4.27bn in the corresponding 2017 period. Sure, the business had a favourable Easter timing to partly thank for the improvement in turnover, but it still continues the robust updraft that has kicked in over the past year.
IAG saw 2.3m passengers fly in it planes during the last quarter, up 8.5% year-on-year, and its ongoing expansion strategy should continue to lift this number higher as total capacity increased 4.1% in the first three months, it advised.
What’s more, IAG’s individual planes are taking off with more and more people on board, the group load factor improving 1.5% year over year to 80.5%. I am tipping strong economic conditions across its major territories to keep traveller numbers swelling too.
On cloud nine
With IAG also getting a grip on its cost base — non-fuel costs fell 5.7% in quarter one, and fuel costs rose a meagre 0.6% despite the rising crude price — City analysts are forecasting the flyer to keep putting in reliable profits growth for some time yet.
Current projections suggest that earnings rises of 5% are on the cards for both 2018 and 2019. And these figures cement IAG’s reputation as a bona fide bargain, the company changing hands on a forward P/E ratio of 7 times.
When you add dividend yields of 3.7% and 4.1% for 2018 and 2019 respectively into the mix, I think it is an irresistible share selection.