Should I Buy International Consolidated Airlines Group?


LONDON -- I'm window shopping for shares again, and there are plenty of goodies for sale. Should I pop International Consolidated Airlines Group into my basket?

Two becomes one
When renowned European airlines British Airways and Iberia merged together in January 2011, it seemed like the sky was the limit. But International Consolidated Airlines has struggled to get off the ground. Recent losses have had nervous investors reaching for their parachutes, but could now prove a good time to buy?

Lesser investors will have been tempted to take flight at last week's first-quarter results, which showed an operating loss of €278 million, before exceptional items, worse than consensus forecast of €230 million. With an exceptional €311 million charge for restructuring at Iberia, total pre-tax losses hit a whopping €670 million for the quarter, against €247 million in 2012. IAG doesn't just lose money, it loses it regularly. Total revenue rose just 0.5% to €3.939 billion, despite a 1.2% currency hit. Passenger unit revenue rose 3.9%, or 5.3% on constant currency, while capacity fell 2.1%. A 3.4% fall in fuel costs helped, although non-fuel unit costs rose 5.8%.

Pain in Spain
Chief executive Willie Walsh called the results "encouraging", arguing that the €278 million loss was €38 million better than last year at constant currency, while admitting there is more work to be done on restructuring Iberia. Passenger unit revenue was strong, despite 10 days of industrial action at Iberia (now resolved) and the weak Spanish economy. Iberia is cutting headcount, British Airways is adding heads, as it prepares for new aircraft, with fleet replacement orders for 18 Airbus A350 and 18 Boeing 787.

The market was downcast, with a 4% share price dip in the last week. But IAG has flown over 12 months, rising 75% against 25% for the FTSE 100 as a whole. Ongoing troubles at Iberia and Walsh's unhappiness at the CAA, which runs Heathrow, "the world's most expensive hub", suggest the group still faces headwinds. IAG has just announced that it will issue a €400 million convertible bond to fund its purchase of low-cost Spanish carrier Vueling, to boost liquidity and pay off bridging loans. That hit the share price, as it will increase IAG's financing costs, which already has an outstanding £350 million bond in circulation.

I'm IAG, fly me
Investors clearly have to brace themselves for the long-haul, but without the oxygen mask of a regular dividend, because IAG doesn't pay one. Pre-tax profits are forecast to recover in 2013 to €287 million, putting the stock or a forecast p/e ratio of 29 times earnings, then climb even higher in 2014 to €770 million, cutting that forecast p/e to just 11 times earnings. Investors will be hoping the forecast 164% earnings per share (EPS) growth in 2014 will land bang on schedule. Deutsche Bank rates IAG as a buy with a target of £3.30, against today's price of £2.74. But I've suddenly discovered a fear of flying.

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