November 8, 2019 / 7:28 AM / 13 days ago

BA owner IAG trims capacity growth forecast to shield margins

LONDON (Reuters) - British Airways owner IAG (ICAG.L) scaled back its three-year capacity growth forecast on Friday, hitting its earnings per share outlook but protecting its margins in the face of a weak global economy and a highly competitive marketplace.

FILE PHOTO: British Airways aircraft are seen at Heathrow Airport in west London, Britain, February 23, 2018. REUTERS/Hannah McKay

“We’re well-prepared for anything that comes at us. We’ve seen a softening economic environment, and therefore we’re adjusting our growth plans,” IAG Chief Executive Willie Walsh told analysts during a capital markets briefing.

The airline industry has struggled to maintain margins in the face of industry overcapacity and a muted economic outlook, which has produced fierce competition over ticket prices.

Germany’s Lufthansa (LHAG.DE) has said slower capacity growth at rivals was providing relief, with Ryanair set to grow at its slowest rate in seven years in the year to March 31, 2021.

“We still see growth ... but we’re moderating our growth. Even in that environment ... we will be generating very significant amounts of cash to be able to ensure that our shareholders get rewarded for their faith,” Walsh added.

Although Walsh was presenting mid-term targets, he is likely to leave before the end of the period as the long-serving CEO confirmed he plans to retire by October 2021.

“I still love what I do, but my intention is to be retired within the next two years,” Walsh said.

IAG, which has cut its outlook for capacity growth in 2019 as the year has progressed, estimated available seat kilometers will grow by 3.4% a year between 2020 and 2022. It had previously forecast 6% annual growth for 2019-2023.

TOO MUCH CAPACITY

The owner of Iberia, Aer Lingus and Vueling, said the capacity growth cut would lower its forecast for earnings per share (EPS) growth to 10%+ a year from 12%+ a year.

However, it reiterated its targets for operating profit margins of 12-15% and return on invested capital, and shares recovered from a steep early fall to trade just 0.2% lower.

Chief Financial Officer Steve Gunning said IAG had probably had too much capacity in the market in first quarter, adding that there would be no growth at Vueling next year.

IAG has also taken a hit from pilot strikes at British Airways, which has knocked its profit outlook, but it said the forecasts for capacity growth were not adjusted for these.

Although the dispute over pay remains unresolved, there is no further industrial action scheduled and British Airways CEO Alex Cruz said that people could look forward to Christmas.

IAG’s strategy update comes after it said on Monday it would buy Spain’s Air Europa to boost its presence on routes to Latin America and the Caribbean.

IAG said it expected the deal, which will be funded through external debt, to close in the second half of 2020 and for it to add to its earnings in the first full year after closure.

Reporting by Alistair Smout; Editing by Dale Hudson and Alexander Smith

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