Everything Is Working Really Well

All figures in euros unless stated. IAG reports in EUR; the LSE-listed shares trade in pence (current 396.2p ≈ €4.52).

Q1 highlights

The trajectory into FY 2025 is striking.

Four-year recovery

The encouraging item is cost discipline:

• Employee costs: +0.7% year-on-year, well below inflation.
• Fuel and emissions: +1.2% year-on-year — reasonably good, though partly because they entered the period with relatively low fuel charges. With Brent and jet fuel having moved sharply on the back of the Iran conflict, this is a line to watch closely from Q2 onwards. IAG hedges fuel, which gives them a buffer relative to unhedged US peers.
• Handling, catering and other operating costs: −1.5% — genuinely good.
• Landing fees: +4.5% to €579 million — a slight disappointment.
• Engineering and other aircraft costs: −14.5% year-on-year — very strong.

Load Factors and Yield Pressure

There has been some long-haul yield pressure, particularly on Aer Lingus, driven by high levels of competition on the North Atlantic. There is also slightly softer demand in the Eastern Mediterranean, which is unsurprising given the geopolitical backdrop. That said, the load factor picture is generally encouraging across the network.

Passenger load factors by region (Q1 FY 2026)

The North Atlantic at 79.1% is the lowest of the regions, which partly reflects the competitive pressure on Aer Lingus and some seasonal softness. But elsewhere, these are strong numbers — Latin America and the Caribbean at 89.8%, domestic at 88.3%, and Asia Pacific at 88.4% are all very healthy load factors for Q1, which is historically the quietest quarter of the year.

Middle East Conflict — Exposure and Response

Only about 3% of IAG's capacity was exposed to the Gulf region, operated mostly by British Airways with smaller amounts by Iberia and Vueling. The affected network included the UAE, Qatar, Saudi Arabia, Bahrain, Israel, Jordan, and Cyprus. This is a relatively limited exposure compared to some peers, and the hedging position provides additional protection.

What I would say, in a general sense, is that I don't consider IAG to be that dynamically run. But there is always opportunity — and the opportunity here is significant. IAG has destinations across the world and can redeploy capacity. In my opinion, they should be redeploying aircraft across the network, testing out new routes at short notice. There are a lot of people who would rather not fly to destinations in or near conflict zones, but they still want to travel. That latent demand is sitting there waiting to be captured, and an airline with IAG's global reach is well placed to do exactly that — if they are agile enough to move quickly.

Depreciation — a Structural Concern

Depreciation, amortisation, and impairment rose 8.7% to €672 million. This is a concern area for me — and a structural one, not specific to this quarter. Airlines are at the whim of their depreciation assumptions on aircraft. If a new generation of materially more efficient planes emerged, carriers would be forced to replace fleets and depreciation assumptions would change dramatically, with significant flow-through to the income statement. This is a risk I worry about across the whole sector, not just IAG.

Finance costs fell 17.8% to €180 million. Heading the right way. But I'd push the point harder: for a group talking about returning €1 billion of excess cash to shareholders, I think they could do even better by paying down debt.

To put it in perspective — Q1 profit after tax was €301 million with €180 million of finance costs. At the extreme, a debt-free IAG would have produced €451 million of post-tax profit this quarter, a 49% permanent uplift to earnings. I'm not suggesting they should run with zero debt. But as we head into a period where I don't expect a return to ultra-low rates, structurally reducing the debt would be a more beneficial use of cash than handing it back.

Excess cash returns programme

My preference would be for them to temporarily hold the cash, signal that it's being kept in reserve, and consider a special dividend next year once the disruption is better understood — rather than pushing it out. Companies right now are way too keen to hand out cash. Reducing the debt further and structurally eliminating part of the €180 million quarterly finance bill would be a more durable use.

Balance sheet strength

Pointedly, there is no evidence of significant negative impact in these Q1 numbers, which is encouraging. That said, the conflict only really hit airline operations from late February/early March 2026 — most of Q1 was unaffected.

The wider sector picture is more difficult: jet fuel prices are up over 80% since the conflict began, airlines have cut 9.3 million seats globally for June–September, and Middle East airspace remains heavily disrupted. FY 2026 is unlikely to be a great year for IAG's headline figures as more of the disruption flows through, even though hedging and a relatively limited Gulf transit exposure leave them better placed than peers.

I am using the FY 2025 earnings per share of 69.5 euro cents (approximately 60.1p per share at current FX) and applying 8% forward growth. The trailing three-year earnings per share compound annual growth rate is far higher (125% averaged), but that's a misleading post-COVID rebound number — 8% feels more realistic.

Against that, I'm applying a 20% valuation reduction to reflect the one-off hit I expect FY 2026 profitability to take from the Iran crisis, plus a 32% risk discount to reflect the possibility that things deteriorate further (Iran escalation and additional Trump-related macro disruption). Probability-weighted at 60% — reflecting that I am genuinely happy with the company's forward potential, and noting that the share price is only approximately 9% down from pre-crisis levels, so a lot of the recovery has already happened.

VALUATION SNAPSHOT

• Iran crisis escalation: Jet fuel prices are up over 80% since the conflict began. If the crisis worsens or the Strait of Hormuz disruption extends, FY 2026 profits will be materially impacted beyond Q2.
• Depreciation risk: Depreciation, amortisation, and impairment rose 8.7% in Q1. A step change in aircraft technology could force fleet write-downs across the sector.
• Capital allocation: The €1 billion excess cash returns programme is ongoing. In the current environment, returning cash may prove premature if the crisis deepens — retaining it for balance sheet resilience would be more prudent.
• FY 2026 headline risk: Most of Q1 was unaffected by the Iranian crisis. As the disruption flows through Q2–Q4, headline figures will deteriorate, potentially spooking sentiment even if the underlying business is sound.
• Landing fee inflation: +4.5% in Q1 — a persistent structural cost that airports continue to pass through to carriers.
• Trump-related macro disruption: Tariffs, geopolitical escalation, or further trade policy shifts could add to inflationary pressure and suppress transatlantic demand.

• Iran de-escalation: Would immediately adjust the 20% crisis discount from the valuation and improve forward fuel cost expectations.
• Operating margin sustained above 15%: If IAG can maintain the 15.1% FY 2025 operating margin through the crisis, it would demonstrate exceptional operational resilience.
• Net borrowing below €5 billion: Continued deleveraging would reduce the €180 million quarterly finance cost and structurally improve earnings.
• Share price below 350p: Would widen the value opportunity further, making the risk/reward even more compelling.
• Suspension of excess cash returns: Paradoxically, this would be a positive signal — it would show management is prioritising balance sheet resilience over shareholder optics during a period of uncertainty.