International Consolidated Airlines Group LON: IAG reported a stronger start to its fiscal year in first-quarter 2026, with management highlighting resilient demand—particularly in premium cabins—alongside a sharp year-over-year increase in profitability. Executives also cautioned that the quarter reflected only a limited fuel cost impact from the Middle East conflict, which they expect to weigh more heavily on results in subsequent quarters.
First-quarter profit jumps as revenue rises
Chief Executive Officer Luis Gallego said IAG delivered a “strong first quarter,” with revenue up 1.9% and operating profit rising 77% to €351 million. Operating margin improved 2.1 percentage points to 4.9%, which Gallego noted came in the group’s “seasonally quietest quarter.”
Chief Financial Officer Nicholas Cadbury said the increase in operating profit—up €153 million versus last year—was “driven by the strong passenger revenue growth,” partially offset by higher fuel costs in March. He added that results benefited from the early timing of Easter this year and a “small impact” from the Heathrow Airport closure that occurred on March 21 last year.
Cadbury also pointed to a €48 million profit benefit from foreign exchange, attributing it “particularly [to] the impact of the weaker USD against both the euro and the sterling.”
Airline-by-airline performance and loyalty growth
Cadbury said “all but Aer Lingus” delivered improved results in the quarter. Aer Lingus posted a larger seasonal loss year-on-year, which he attributed to “the ongoing high level of capacity from competitors into Dublin, putting pressure on yields,” as well as Manchester base closure costs.
Among the group’s larger carriers:
- British Airways delivered higher profits and margins year-on-year, driven by passenger unit revenue growth of 8.5%. Cadbury cited strong demand on the long-haul network, “in particular on North Atlantic and short-haul leisure routes,” and said the business travel market remained strong.
- Iberia delivered an operating margin of “over 9%” in the quarter, improving 1.6 percentage points year-on-year. Cadbury said performance was driven by strong revenue and improved costs, with demand strong on routes to Latin America and in Spain’s domestic market.
- Vueling reported a smaller seasonal loss year-on-year, with Cadbury pointing to strong revenue performance and particularly strong Spanish domestic routes, while noting routes to the U.K. and Italy were “a little bit more challenging.”
Management also highlighted the performance of IAG’s “capital light” loyalty business. Gallego said the segment grew revenue by 10% and profit by 32.6%, with a 20% margin. Cadbury added that loyalty, including BA Holidays, delivered “high quality, high margin, asset light earnings,” with profit increasing more than 30% in the quarter and margins rising to over 20%.
Cadbury said the profit growth was “mainly in the loyalty business, driven by non-airline partnerships,” while the holiday business was flat year-on-year “as we invest in the holiday platforms.” He said the group expects loyalty to deliver “just over 10%” earnings growth for the full year.
Demand trends: premium strength, Atlantic routes, and Spain domestic
Cadbury said passenger unit revenue increased 8.2% at constant currency (3.5% reported), while capacity was broadly flat year-on-year. He said capacity came in below earlier guidance due to cancellations to Middle East destinations and aircraft availability constraints related to “ongoing technical challenges.”
By region, Cadbury and other executives highlighted:
- North Atlantic: unit revenue increased 6.8% at constant currency on a small capacity reduction. Cadbury said underlying performance improved sequentially versus the prior quarter, noting British Airways was notably strong even as Aer Lingus worsened due to intensified competition.
- Latin America and Caribbean: described as IAG’s “strongest long-haul network performer,” with unit revenue up 9% at constant currency and capacity up just under 2%. Cadbury said all three cabins at Iberia contributed.
- Domestic (Spain): unit revenue rose 18% at constant currency on a 2.5% capacity reduction. In Q&A, management cited demand across the Canary and Balearic Islands and the Spanish mainland, partly benefiting from disruption to train services and shifting Mediterranean demand.
- Europe: unit revenue increased 6% on a 1.6% capacity cut. Cadbury said Aer Lingus short-haul performance worsened due to added competition, while BA and Iberia were strong in business and leisure segments.
- Africa/Middle East/South Asia and Asia Pacific: Cadbury said March cancellations linked to the Middle East conflict weighed on Middle East routes, but some demand shifted away from Middle Eastern hubs toward South Asia, Africa, and Far East routes.
On cabin trends, executives said they were not seeing weakness in long-haul economy demand. Sean (speaking on the call) said long-haul economy and premium economy (“World Traveller Plus”) were “performing robustly,” adding that a greater mix of premium economy helps with “stickiness and pricing.”
Costs, fuel hedging, and capacity outlook amid Middle East conflict
Cadbury said total unit costs improved 0.5% and non-fuel unit costs improved 0.9% year-on-year, while fuel unit costs increased 0.9%. He said the rise in fuel late in the quarter—“particularly from February 28th due to the Middle East conflict”—was “largely offset” by IAG’s hedging strategy and commodity contract pricing timing.
Looking ahead, Gallego said the group reallocated capacity previously flown to the region—about 3% of total group capacity—toward markets with reduced supply, citing examples including British Airways adding flights to Bangkok, Singapore, and the Maldives. He said Iberia and Vueling replaced Tel Aviv flying with more domestic capacity, and that IAG is also using spare aircraft to add resilience to schedules affected by engineering and maintenance supply chain issues.
For 2026 capacity growth, Gallego said IAG is reducing its earlier expectation of about 3% growth to around 1% for the full year, with Q2 at 1% and Q3 at 2%, while plans for Q4 were still being finalized.
On fuel, Gallego said IAG remains “well hedged for the rest of the year,” and that the situation is “more about price than availability.” He also said IAG is confident in fuel availability through the summer due to its market positions and investments in self-supply capabilities at hubs.
In Q&A, management said fuel cost recovery will vary by market. Gallego said pass-through would likely be stronger in long-haul and premium markets and more challenging in “more competitive markets like short-haul Europe.” Cadbury added that Q2 recovery is likely lower because a significant portion was already booked before the crisis, describing it as “probably 50% for kind of Q2 overall,” rising as the year progresses.
Fuel cost forecast rises; cash returns and balance sheet strength
Gallego said IAG now forecasts total fuel cost of €9 billion for the year—€2 billion higher than the €7 billion scenario presented at full-year results in February—and expects to recover around 60% of the increase through revenue and cost actions and transformation benefits. He said the group continues to expect significant free cash flow, though “slightly lower” than the €3 billion previously guided.
Cadbury said net debt fell to €4.2 billion at the end of March, supported by profitability and seasonal working capital inflows, with net leverage at 0.5x. Gallego characterized the balance sheet as “incredibly strong,” and reiterated that IAG remains on track to complete the remaining €1 billion of excess cash returns by the end of February next year, consistent with prior guidance.
On capital allocation, Cadbury said the group was nearing completion of the current €500 million share buyback tranche “in the next couple of weeks,” and intends to move on to the next tranche thereafter. He also said IAG expects to take delivery of 17 aircraft this year and plans roughly €3.5 billion in capital expenditures, slightly below prior guidance due to phasing.
On consolidation, Gallego said the current environment “may create consolidation opportunities,” but stressed IAG would remain “highly disciplined.” He referenced IAG’s decision to withdraw from a TAP process, saying the group did so because it did not believe it would “deliver value for our shareholders.”
About International Consolidated Airlines Group LON: IAG
International Consolidated Airlines Group SA, together with its subsidiaries, engages in the provision of passenger and cargo transportation services in the United Kingdom, Spain, the United States, and rest of the world. It also provides aircraft leasing, aircraft maintenance, tour operation, air freight operations, call centre, ground handling, trustee, retail, IT, finance, procurement, storage and custody, aircraft technical assistance, human resources support, and airport infrastructure development services; and manages airline loyalty programmes.
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