LONDON (Reuters) - British Airways owner IAG (ICAG.L) said it will return 500 million euros (423 million pounds) to investors after reporting higher annual profits on Friday, helped by cost-cutting and lower fuel costs.
Europe's largest airline group said annual operating profit rose 8.6 percent to 2.5 billion euros, in line with expectations, sending shares up 2 percent. It said it expected higher profits this year.
IAG's British Airways transatlantic business, based at London's Heathrow, has held up well compared to Europe's highly competitive budget market. Heathrow on Friday reported record passenger figures in 2016.
CEO Willie Walsh was bullish in the face of an announcement by Norwegian Air (NWC.OL) that it would offer transatlantic flights on 10 new routes, with tickets starting at $65.
"I've always said we'll compete with Norwegian. The difference between Norwegian and us is we're profitable," he said. "The fares that they've launched are clearly just designed to get some headline media coverage. They're not sustainable."
Walsh said that across IAG he expected 2.5 percent capacity growth in 2017, with Irish airline Aer Lingus expected to grow quicker than British Airways.
For 2016, operating profit before exceptional items rose despite revenue slipping by 1.3 percent to 22.57 billion.
It benefited from a lower fuel price environment and cost savings, the company said.
The company was hit, however, by an adverse currency impact of 460 million euros after a slump in the British pound following Britain's June 23 vote to leave the European Union.
"IAG has reported solid and in-line fourth quarter and (2016) earnings despite a tough yield environment and currency headwinds," analysts at Cantor Fitzgerald said in a note.
Analysts expect IAG, which also owns Spain's Iberia, to achieve a 2017 profit of 2.5 billion euros, in line with this year, Thomson Reuters data showed.
IAG said it planned to carry out a share buyback of 500 million euros this year, and announced a final dividend of 12.5 euro cents per share.
(Refiles to fix garble in first paragraph)
Editing by Lina Saigol and Jason Neely