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IAG Looks to Next Summer For Full Recovery

Madhu Unnikrishnan
November 5th, 2021 at 1:50 PM EDT

The chief executive of International Airlines Group (IAG), parent company of Aer Lingus, British Airways, Iberia, and Vueling, thinks the third quarter marked an important “inflection point,” as the group reported its first three-month period generating cash since the crisis began. The future looks decidedly brighter for the group, and it is planning to almost fully restore its 2019 capacity by next summer.

Several important milestones led to this optimism. First, Ireland in mid-July relaxed its almost-total ban on nonessential travel, which boosted Aer Lingus. Second, the UK reformed its “traffic light” travel-restriction system and subsequently eliminated the “red” list of countries from which travelers were barred or faced strict quarantines. And third, the U.S. will start admitting vaccinated international travelers from November 8. The latter development arguably will have the most impact on IAG’s bookings, CEO Luis Gallego said, as the North Atlantic is among the group’s most important and lucrative markets.

Advance bookings for Caribbean and North Atlantic travel are now exceeding 2019 levels for November, Gallego said. “The reopening of the North Atlantic on the eighth of November will be crucial for us.”

The group also was encouraged by the strength of the domestic Spanish market, which benefited both Iberia and Vueling. Spain relaxed its restrictions before the UK and Ireland. Capacity on both those airlines exceeded 2019 levels in the third quarter. Vueling also benefited from the French government mandating that Air France give up 18 Paris Orly slots as a condition of state aid. The Spanish carrier now is the third-largest at Orly after Air France and its subsidiary Transavia France, with 54 European routes from the airport.

Other regions of the world also contributed to the optimism. Visiting friends and relatives (VFR) traffic to India and West Africa remains strong, and bookings to those regions are picking up for the holidays. Winter leisure bookings to the Caribbean and to Latin America — especially important to Iberia — continue to gather steam. But the Asia-Pacific region, other than India, remains locked down with the recovery not expected to occur anytime soon — which especially affects British Airways, for which Northeast Asia and Singapore were key markets.

In the third quarter, IAG doubled its capacity from the second quarter, taking advantage of strong leisure demand in Europe, but it still was only 43 percent of 2019 levels. Looking ahead, IAG plans to operate 60 percent of its 2019 capacity in the fourth quarter, with December reaching 70 percent of two years ago.

But the real prize is next summer. IAG anticipates being almost fully back by next summer as it forecasts strong pent-up demand across the North Atlantic. The group’s airlines are recalling furloughed employees and are expected to begin hiring in the fourth quarter of this year.

The North Atlantic market is expected to be almost at full capacity next summer. Iberia and Aer Lingus plan to fly more than their 2019 capacity in that market, due in part to new U.S. routes for Iberia — Dallas/Ft. Worth and Washington, D.C. — and Aer Lingus launching flights from a new base in Manchester. British Airways will fly 96 percent of its 2019 capacity next summer.

The competitive landscape in this important market is expected to change. Before the pandemic, Norwegian Air accounted for 8 percent of total North American traffic from London. That capacity is gone now that Norwegian Air has given up its longhaul network, and it has not been filled by other airlines. Meanwhile, Gallego said Europe’s legacy carriers are not expected to offer the same capacity next summer as they did before the pandemic. JetBlue’s London flights also are not a concern, British Airways chief Sean Doyle said. The U.S. carrier is offering only a handful of London flights on Airbus A321LRs with comparatively small premium cabins, which should not affect pricing significantly for North Atlantic routes, he said.

Another trend that encourages IAG about next summer is the rise of premium leisure travel. Although corporate travel is returning, the front the aircraft increasingly is occupied by leisure travelers, especially on Iberia’s Caribbean, Central American, and domestic Spain routes. British Airways expects to take advantage of this trend when North Atlantic travel resumes in force after November 8. The group is putting its money where its mouth is by adding more seats to appeal to this segment. IAG is “rationalizing” its first class cabins, reducing the number of seats on some aircraft and eliminating the cabin altogether in others. These seats will be replaced by more business class seats and larger premium-economy cabins. If this trend continues, the group could change the configurations completely on new aircraft to be delivered from 2024 onward.

Cargo also was a bright spot during the quarter. The group flew fewer cargo-only flights, but the capacity was offset by more belly-hold cargo as international longhaul began its slow climb back out. IAG reported record third-quarter cargo revenues of €405 million ($468 million), or 34 percent more than in 2019. The group expects cargo to remain strong, especially in Europe and North America, driven by the shift to e-commerce, port congestion and the global dearth of shipping containers.

Group-wide, however, the quarter was marked by another loss, although halved from last year to €452 million. Revenues more than doubled to €2.7 billion. IAG forecasts a fourth-quarter loss of €3 billion, but expects to return to profitability next year.

“We hope that from now on, we will be talking about more positive numbers,” Gallego said.

Madhu Unnikrishnan
November 5th, 2021 at 1:50 PM EDT

Photo credit: IAG sees real opportunity in next summer's transatlantic market.  British Airways

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