International Consolidated Airlines shares are firmly grounded this morning, down after the release of full year results. While headline revenues and adjusted EBIT looked encouraging at €22.97bn and €3.1bn respectively (vs. expectations of €22.97bn and €3.05bn), and both passenger numbers and total capacity improved 4.1% and 6.3%, a closer analysis of key performance metrics reveals the reasons for today’s share price turbulence. Even a 14.5c dividend, higher than the 12.5c expected, isn’t helping, nor a repeat of last year’s €500m share buyback.

Falling passenger revenues per available seat kilometre (Rev. per ASK; -1.5%) highlight the challenges facing IAG during a vast restructuring drive. Furthermore, despite rising oil prices, the company successfully saw fuel costs fall a helpful 5%. Instead, rising costs in engineering (+4.2%), property & IT (+5.2%) and sales (+9.6%) reflected the impact of investment to help the business evolve.

While CEO Walsh praised the results as ‘very good’ in the face of a transformational period, the results don’t necessarily leave investors any clearer as to how current restructuring will benefit the group in the long-term.

Increasing capacity seems to be no problem for IAG, especially given the swathe of available assets following high profile collapses of budget European peers. But improving returns from capacity already available to the company will be the key challenge moving forwards amid an ever more competitive sector.

Perhaps more worrying for management and shareholders alike will be the potential for today’s share price gap lower towards February’s trough and shallow rising lows support at 590p, opening the gates for a bearish flag towards April 2017 lows of 516p.

Henry Croft, Research Analyst, 23 February 2018