The International Consolidated Airlines Group (LSE:IAG) share price was 3.5% higher in the first few minutes of trading today (28 February) after the airline announced its annual results.
Comparing 2024 with 2023, the group reported a 9% increase in revenue. And a 26.7% rise in operating profit before exceptional items to €4.44bn. This was significantly ahead of the consensus forecast of analysts of €4.08bn.
Also, as a result of “structural improvements” its operating margin improved by 1.9 percentage points to 13.8%.
As further evidence of an improving balance sheet, debt relative to earnings fell during the year. At 31 December 2024, net debt was 1.1 times EBITDA (earnings before interest, tax, depreciation and amortisation). A year earlier, it was 1.7.
This measure is important because the directors have said that further distributions to shareholders will be made “when net leverage is below 1.2x to 1.5x, with consideration to the outlook and depending on future capital requirements and commitments”.
Indeed, over the next 12 months, €1bn is expected to be returned by way of dividends and share buybacks. The 2024 dividend has been increased to 9 euro cents (7.43p at current exchange rates).
Overall, I think the results demonstrate that the group’s strong post-pandemic recovery is continuing. Since February 2022, its share price has been the fourth-best performer on the FTSE 100.
Potential challenges and opportunities
But operating an airline isn’t easy. There are all sorts of financial, operational and technical risks that need to be overcome.
In particular, rising oil price can play havoc with earnings. Although buying in advance can give some certainty over costs, there’s little an airline can do in a rising energy market. However, the recent softening in prices has helped the group. In 2024, fuel costs and emissions accounted for 27.3% of its total expenditure on operations. During 2023, it was 29.1%.
Despite the increase in revenue and earnings, income investors are likely to prefer other stocks. Even after today’s boost to the dividend, IAG’s yield is 2.1%. The average for the FTSE 100 is 3.6%.
However, I think there are many reasons to be positive.
I like the fact that the group’s portfolio of airlines covers all sectors of the market. Its two flag carriers — British Airways and Iberia — are well placed to benefit from the anticipated growth in long-haul air traffic. It also owns low-costs airlines, Vueling, Aer Lingus and LEVEL. These fly across Europe, North Africa and — crucially in my view — the United States.
In its latest report, the International Air Transport Association is predicting — by 2043 — an additional 4.1bn passengers each year. This is equivalent to an annual growth rate of 3.8%.
This could help explain why the group appears to have the majority support of the 17 brokers covering the stock. Prior to today’s announcement, 12 of them rated it a Buy and five said Neutral.
Final thought
After today’s reaction of investors, IAG trades on a historical (2024) price-to-earnings ratio of 7.6. This compares favourably to the average of 71 listed airlines (9.05).
Continued growth, a solid (if unspectacular) dividend and a below-average valuation multiple are reasons why investors could consider adding the airline group to their long term portfolios.
