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BA owner warns ticket prices may rise as profits hit by falling pound

Published 28/10/2016

IAG chief executive Willie Walsh said the results had been affected by a tough operating environment
IAG chief executive Willie Walsh said the results had been affected by a tough operating environment

The owner of British Airways (BA) has warned that ticket prices may have to rise as it endured a bumpy ride in the third quarter, with profits taking a hit from the slump in sterling and air traffic control strikes.

Willie Walsh, chief executive of International Airlines Group (IAG), said it may increase BA ticket prices to offset the collapse in the pound, as he revealed that industrial action and sterling's weakness had dealt a 162 million euro (£145 million) blow to operating profit in the three months to the end of September.

Operating profits before exceptional items came in shy of expectations, falling 3.6% to 1.205 billion euro (£1.08 billion) in the third quarter, down from 1.250 billion euro (£1.12 billion) over the same period last year.

Mr Walsh said: "While strong, these results were affected by a tough operating environment with a very significant negative currency impact."

He added: "At current fuel prices and exchange rates, IAG expects its operating profit for 2016 to be around 2.5 billion euro (£2.2 billion), and has seen no significant change in its short-term trading conditions."

The group said it suffered "weak trading conditions" in June - both before and after the Brexit vote - with its premium cabins bearing the brunt of the slowdown.

However, it added that it had not faced any "immediate regulatory impact" in the aftermath of the EU referendum.

IAG issued a profit warning after the referendum on June 23, causing its share price to tank 19%.

The group, which also owns the Aer Lingus and Iberia airlines, said total revenues before exceptional items slipped 4% to 6.486 billion euro ( £5.81 billion) in the third quarter, compared with 6.756 billion euro (£6.06 billion) in 2015.

Passenger revenue dropped 5% to 5.806 billion euro (£5.20 billion) over the period, down from 6.136 billion euro (£5.5 billion) last year.

The firm said it had come under pressure in the nine months to September 30, with lower fuel prices only partially offsetting headwinds from Britain's vote to leave the European Union, a string of overseas terror attacks, air traffic control strikes and currency movements.

Sterling has fallen around 20% against the US dollar since the Brexit vote.

The third-quarter update comes after IAG announced a new pensions agreement with British Airways on Wednesday, which puts a cap on any extra contributions the carrier could be forced to make.

The move is expected to give BA more room to pay dividends to IAG.

Mr Walsh also warned on Tuesday that the cost of a new runway at Heathrow would "make or break" the project after the Government backed the global transport hub.

He said it was vital that the UK and travelling public "get the benefits from the runway, not the airport's owners".

Shares in IAG were up more than 2% on the FTSE 100 Index following the results announcement.

George Salmon, equity analyst at Hargreaves Lansdown, said: "It has been a tough period for the airlines. Headwinds have included increasing competition, terrorism and, for IAG, adverse exchange rate movements.

"Furthermore, after Opec agreed to a production cut, the oil price has picked up recently. That means that higher fuel costs could yet add to the list of headwinds if the oil price continues to rise.

"With the outlook for the UK and world economy shrouded in uncertainty, the airline sector could be set for some turbulent times.

"Should a recession hit, investors will be concerned that BA's premium customers trade down to standard class, which would seriously affect IAG's profits."

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