City forecasts for British Airways owner IAG cut ‘significantly’ after string of cancellations and spiralling fuel prices
City forecasts for British Airways owner IAG have been cut ‘significantly’ after a string of cancellations and spiralling fuel prices.
Brokers at Peel Hunt halved their annual forecasts for the FTSE100 group – which also owns Aer Lingus and Iberia – from €997million (£839 million) to €495 million £416million).
Analyst Alex Paterson warned that passengers might ‘book elsewhere’, turning to rival airlines, after IT failures and mass cancellations led to travel misery for thousands of Britons over the Easter break.
Struggle: Recent data shows BA cancelled more flights than any other airline during the first week of April
The disruptions came at a crucial time as the industry entered one of the first major holiday periods since the easing of pandemic travel restrictions.
Recent data shows BA cancelled more flights than any other airline during the first week of April. Many of these were due to staff shortages and sickness following another spike in Covid infections.
Budget airline easyJet also came under fire for cancellations.
IAG may have to earmark cash for paying compensation in future should any more disruption arise, he said. It may also be forced to hike its marketing budget to help ‘diffuse customer concerns’ in that event.
Rapidly increasing jet fuel bills have also been a headache for carriers after oil prices spiked to multi-year highs at the start of the year. Brent crude rebounded last year when Covid lockdowns lifted, but it rallied even further following Russia’s invasion of Ukraine. Oil started the year at less than $80 a barrel then jumped as high as $130 in March.
IAG has hedged much of its fuel prices for the year – meaning it has locked in prices and is less vulnerable to big swings.
But Paterson warned that IAG was less hedged than many other airlines and believes its fuel bill will jump.
Peel Hunt has increased its forecast from €5.9billion to €6.3billion (£5.3billion). This eye-watering sum is close to IAG’s annual turnover of €8.5billion (£7.2billion) last year, with price pressures potentially sparking ticket price hikes. Peel Hunt forecast IAG’s revenue this year will be €21.3billion (£18billion).
The broker also said BA’s technical blunders are not something its rivals are facing.
The company, which is led by Spanish businessman Luis Gallego, will release a trading update for the first quarter on May 6.
Stephen Furlong, an analyst at Davy, said the ‘number one reason’ for analysts’ profit downgrades will be the oil price. He told The Mail on Sunday: ‘There is no question that the higher oil price is a huge headwind for the airline industry.’ Davy recently lowered its forecasts for IAG’s full-year profit from €992million (£834billion) to €704million (£592billion). This was before the most recent travel chaos.
IAG’s giant debt pile is expected to grow in 2022 as the airline boosts investment for the post-pandemic travel rebound. Furlong said: ‘IAG had a pandemic where it prioritised efficiency, but now they are prioritising investment.’
Examples of recent spending include IAG’s plans to draft in 25 new aircraft, as well as BA leasing four planes from FinnAir. These are set to operate out of Heathrow with FinnAir cabin crew from May to August, which could ease some of BA’s recent staffing issues.
John Strickland, from JLS Consulting, an independent air travel consultancy, warned that increased wages are also adding to airlines’ costs at a time of fuel hikes. ‘They are looking at a strong summer but part of the trade-off in meeting demand is incurring a likely increase in staff costs,’ he said.
BA, which recently launched its new short-haul operations from Gatwick, is offering a welcome bonus of £1,000 to poach trained crew from rivals. IAG was contacted for comment.