British Airways’ owner International Consolidated Airlines (IAG) has enjoyed a strong start to 2018. But there is also the specter of a potentially expensive price tag if it really wants to buy Norwegian Air.
IAG bought a 4.61% stake in low-cost rival Norwegian Air in April. That was the prelude to two full takeover offers being made to Norwegian's board, only for both to be firmly batted off.
Norwegian believes the IAG offers undervalue the airline and its prospects.
This looks like a story that could drag on for a bit.
SPIKE IN QUARTERLY PROFITS
IAG delivered a 75% increase in operating profit to €280m in the three months to 31 March, beating consensus of €206m.
Management continues to stick to its upbeat mantra that operating profit will rise this year, even if the market does not agree.
Consensus is for operating profit to fall from £3,015m in 2017 to £2,735m.
That the share price rallied 4.5% to 669.2p on Friday may suggest that investors are increasingly willing to give IAG the benefit of the doubt.
COMPELLING COMBINATION
An early Easter break, higher yields and improving load factor helped to boost passenger unit revenue by 3.5% over the same period, once currency fluctuations are stripped out.
Load factor is important in the airline business. It is effectively a measurement of bums on seats, and this is up 1.5% to 80.5%.
Higher load factor combined with increased revenue per passenger is a compelling metric.
Of course, soaring oil prices mean higher fuel costs, although the 4.7% increase is encouraging given that Brent crude oil is up 8.1% per barrel since January.
IMPORTANCE OF THE BIGGER PICTURE
AJ Bell investment director Russ Mould warns that investors shouldn’t get carried away with the results as it took advantage of external factors - positive currency movements and the early Easter break.
He says judging a business on its quarterly performance is unhelpful and stresses full year guidance depends on stable exchange rates and fuel costs throughout the rest of 2018.
