Over the bank holiday weekend, British Airways suffered what can only be described as a monumental IT failure, which resulted in the airline having to cancel hundreds of flights, disrupting up to 300,000 passengers. And now, while the airline seems to have restored the majority of its services, the fallout for the company is only just starting.
Investor backlash
Shares in British Airways’ parent company, International Consolidated Airlines Group (LSE: IAG) fell as much as 4.2% in early deals this morning as investors digested the company’s troubles. So far, it’s estimated that the debacle could cost the group between £100m and £150m but these are only initial estimates. There are reports that the firm has been charging customers over the odds to rebook tickets, and charging as much as 55p a minute to call its help centre. If these stories turn out to be true, the company’s attempted profiteering of stranded customers could lead to further financial and reputational problems.
BA is already taking plenty of flak for the disruption, which management has described as being a “power supply issue.” However, some analysts believe the disruption could be a direct result of the company’s aggressive cost-cutting — part of the wider IAG group strategy.
What about the rest of the group?
At this early stage, it’s hard to tell exactly how these accusations will impact the company’s strategy and financial performance.
Still, even though BA’s reputation may suffer significantly from last weekend’s troubles, these issues are unlikely to impact the overall performance of the wider IAG group severely. For the year ending 31 December 2017, City analysts are expecting the group to report a pre-tax profit of €2.5bn, more than enough to cover the projected compensation bill. What’s more, as one of the UK’s leading international carriers, demand for BA’s services is unlikely to evaporate overnight. There may be a slight drop in demand in the short term, but there are only so many landing slots at the UK’s major airports. BA controls around 50% of the landing slots at Heathrow, so consumers may find they have no choice but to use the firm.
Continue as normal
Put simply, despite the chaos over the weekend, IAG remains an attractive investment. The airlines group operates four other brands alongside BA, Iberia, Aer Lingus, Vueling and LEVEL, all of which haven’t been impacted by the ‘power surge’ and should continue to perform as before. Granted, profits may suffer this year as compensation claims mount, but growth should return next year and with City analysts currently expecting earnings per share of 86p for 2018, shares in IAG currently look cheap trading at a forward P/E of 7. Shares in the group also support a dividend yield of 3.6%.
So, while BA’s bank holiday problems may have thrown up some turbulence for shares in IAG this morning, the company’s long-term flight path should not be disrupted.
