IAG shares top the UK 100 this morning with Q1 results helping them extend their recent breakout from 633p. Today’s 5.7% jump takes the recent rebound from 590p to 14.7%. More importantly, however, we are close to a retest of Jan highs of 680p. Will this remain a hurdle (so far the case) or can the shares break above a 6-month 675-680p cloud-line to fly a near-20yr high?

Q1 total revenues +2.1% to €5.022bn may well have missed the €5.15bn consensus, however this is easily papered over by Operating profit (ex-items) up an impressive 75% to €280m, easily beating City forecasts of circa €200m/+25%. Passenger Unit Revenues may have fallen 0.7% compared to Passenger Revenues +3.4%, but this can be explained by a 4.1% Capacity increase as the group continues to expand for the long-term. That said, the load factor did edge up another 1.5pts, to 80.5%, and Passenger numbers climbed a healthy 8.5%.

FX tailwinds, however, look to have played a considerable big role in flattering Q1 profitability. €58m worth in fact – just over half the €120m jump in Operating profit. Fuel bills up just 0.6% could be attributed entirely to efficient fuel hedging protection against a rallying oil price. However they still rose a whopping 10.4% at constant currencies. Non-fuel costs also fell a helpful 5.7%. But this too was flattered by FX, falling only 0.9% in constant currency terms and the group admits it only “hedges a portion of its transaction exposures”. An earlier Easter also helped the quarter.

Lower net debt (-9%) is always good to hear, along with an even more comfortable leverage ratio (1.2x EBITDAR, down from 1.5x). It implies solid cash flow, improved profitability and thus cautious spending to expand. But FX played its part, and a continuation of the benefit can hardly be assumed a given.

The group still expects 2018 operating profit up year-on-year, and for passenger unit revenues and non-fuel costs to improve further over the course of the year. As for most, though, it’s clearly still too early to upgrade the FY outlook. Especially while we wait more news on its intentions regarding Norwegian Air Shuttle. It has taken a 4.6% stake but still not agreed anything in terms of takeover. Shares of the prey are down around 8% in Oslo on the lack of comment from IAG.*

Just as IAG shares fell on the Norwegian stake news (12 April), perhaps today’s rally has its own tailwind from the prospect of CEO Willie Walsh not following through on an expensive acquisition.

Mike van Dulken, Head of Research, 4 May 2018

*IAG has since said it is still considering what to do with Norwegian Air Shutttle, which itself says it has already unanimously rejected two proposals (no details given).