A Buy I'm Not Buying Yet

Half-year results for the six months to 30 June 2026, reported on 31 July 2026. Currency note: IAG reports in euros, so all company figures are euros unless stated; earnings per share are quoted in euro cents (59.14c = €0.5914); the share price and the valuation are in pence, because the shares are quoted in London.

IAG is a holding company that owns a group of airlines. The ones that matter to this note are British Airways, Iberia, Aer Lingus and the low-cost carrier Vueling. It sits in Consumer Discretionary, airlines sub-sector.

The group earns its money by selling seats. Revenue is a function of how much capacity it flies and what it can charge for it; profit is what survives after fuel, staff, airport and handling charges, and maintenance.

Two structural features drive everything in this note:

• Fuel is the single biggest cost line — €7,083m in 2025, ahead of employee costs at €6,586m. The group manages it with a rolling hedging programme rather than buying at the day's price.
• The North Atlantic is around 30% of capacity, which makes transatlantic demand — and specifically demand to and from the United States — disproportionately important to the group's margin.

Scale for context: 2025 revenue was €33,213m, operating profit €5,015m, post-tax profit €3,342m and reported earnings per share 69.5 euro cents. The group paid a 9.8c dividend for the year and announced a €1.5bn shareholder return alongside those results.

We are updating our records on the half-year report for the six months to 30 June 2026, which came out on 31 July. In the intervening period between those results and now, the war has continued to go on for a bit longer than I had anticipated it might do.

Revenue increased only by 1%, to around €16.06bn, and reported operating profit fell 14.4%. That is quite disappointing.

H1 2026 versus H1 2025

bps = basis points; 100 basis points equals 1 percentage point. ASKs = available seat kilometres, the industry's measure of capacity: one seat flown one kilometre.

The second quarter is where the damage was done. Second-quarter operating profit was €1,406m at a 15.8% margin, against €1,680m and 19.0% a year earlier, on a €489m increase in fuel costs. Revenue grew 1.9% in the first quarter and just 0.2% in the second.

The balance sheet, to be fair, is in good shape. Net debt is down to €4.7bn from €5.9bn at the year end, net leverage is 0.6 times, and free cash flow of €2.9bn in the half was up €808m. Of the €1.5bn shareholder return announced with the full-year results, €800m of buyback had been completed by the half year, and the €441m final dividend was paid.

Free cash flow is the cash left after running the business and paying for aircraft and equipment — the cash genuinely available for debt repayment, dividends and buybacks. Net leverage of 0.6 times means net debt is a little over half a year's underlying earnings; for an airline, that is low.

The outlook at the interims was that they expect travel across the network to remain strong, and that they were booked 57% of expected revenue for the second half of the year. I find that quite a low figure in total. For the record, the company says it is in line with last year's percentage at the same point.

And they only expected to recover about 60% of the higher fuel cost through revenue and cost initiatives. That is quite a low percentage. The fuel unit cost rose 12.5% in the half, a headwind of around €676m even after €769m of hedging gains, and the company's own words on the recovery were that "pricing and cost actions recovered about 60% of the increase", varying by region, route and customer segment.

Hedge position through the cycle

So the position is that they went into the crisis 62% hedged for the year and have since built that up to around 70% for the second half, which is close to the policy ceiling.

The 2027 book is thinner, and it tails off through the year. If energy prices stay higher for longer, the protection that limited the 2026 damage runs down just as it is needed.

In a general sense, I was getting used to better improvements in the company's revenues than this. In 2025 they managed to increase revenue by 3.5%, to €33.2bn, and that was itself a sharp slowdown from the 9.0% of 2024 and the 27.7% of 2023 as the post-pandemic recovery ran out.

Six-year record, 2020 to 2025

EPS = earnings per share, the post-tax profit divided by the number of shares — here in euro cents. The £ symbol on the historic table in the tear sheet is a labelling issue; the numbers themselves are the euro figures from the accounts.

I'm becoming a little bit concerned about the direction of IAG's figures. My expectation is for total revenue to increase by 1% for the full year, bringing their total revenue up to €33.5bn.

Capacity for the year has been cut to flat, from around 3% growth guided in February and around 1% in May — partly because of the Middle East route suspensions, which they say they are phasing back from September, and partly, in their words, to protect margins.

Total revenue in 2025 was €33.2bn and total expenses €28.7bn. If costs run ahead of a 1% revenue increase, the €5bn of operating profit from last year is not going to be repeated — and the company itself is only holding to its 12% to 15% margin range for the year rather than the 15.1% it delivered in 2025.

But their operating costs are the area where they do seem to be somewhat struggling.

I would project that employee costs will rise by 6% this year, which would bring them up to €6,981.6m. With an 8% rise in fuel, oil and emissions costs, fuel costs go to €7,649.6m. A 4.5% rise in handling, catering and other operating costs means they hit €4,547.8m. Landing fees I'm expecting to stay roughly flat-ish, at a rise of 1% to €2,511.9m, and a 6% rise in engineering and other aircraft costs brings that line to €3,021.0m.

My FY2026 cost expectations

The 2025 base figures are from the company's income statement, where total expenditure on operations was €28,189m. These five lines are 83% of that; property, IT and other costs, selling costs and depreciation — the remaining €4.8bn — I am holding at last year's level.

This means that their total operating costs will increase by around €1.35bn for the full year, against a revenue increase on my 1% assumption of only around €330m. Fuel is the largest single piece of that at €567m, but the four non-fuel lines between them add nearly €790m, and that is the part of the story that has nothing to do with the oil price.

Reducing profit before tax by this amount gives me a profit after tax expectation of €2,584.3m, or 59.14c per share on the 4,370m shares in issue — the earnings override used in the valuation below. That is a fall of around 15% on the 69.5c of 2025, and it sits a little below the 10.9% fall in earnings per share in the first half, which I think is reasonable given the second-quarter run rate and the thinner second-half hedging.

They are still coming up with a positive valuation, but I am a little bit nervous about IAG not being the best of operations, with too much exposure to the US market and unable to hold their costs down like other smarter, better operated companies might be able to do.

I think the exposure to the US market is, in itself, a negative right now, and I would expect further volatility coming from the US market on a demand basis, which other carriers may not experience.

For balance, the company's own numbers do not yet show the softness. The North Atlantic is around 30% of capacity, unit revenue there rose 7.3% at constant currency in the half, and British Airways reported a 16% rise in North Atlantic business revenue and 22% growth at US point of sale in the second quarter. My concern is about where that goes from here, not where it has been.

Unit revenue is revenue per seat flown per kilometre — the airline's average price, adjusted for how much it flew. "At constant currency" means exchange-rate movements have been stripped out, so the change reflects real pricing rather than the euro moving against the dollar. "Point of sale" is where the ticket was bought, so US point of sale tells you about American demand specifically.

There seems to be a fragility here that I don't really like. I have jumped a little bit on my expectations of IAG, where previously I felt like they were a badly run operation but one that showed a lot of promise. I think multiple factors are working against them, such as the Iranian crisis, which is leading to higher energy costs.

I don't think their European or their international travel, excluding the North America markets, are going to be badly affected demand-wise, but I do think that transatlantic travel to the US from Europe may have been affected a little bit by the Trump administration and political machinations.

The weakness is not confined to the group level

• Aer Lingus swung from an €80m profit to a €34m operating loss in the half, and its chief executive said only €45m of the €114m decline was fuel — the rest being competitor capacity growth of 40% in short-haul and 50% in long-haul.
• Vueling's operating profit halved to €46m in the price-sensitive European market.
• Iberia held a 13.5% margin and British Airways added €44m.

So it is the two smaller airlines that are struggling — but they are struggling on cost and competition rather than fuel alone.

And most concerning of all, effectively their revenues are not keeping pace with inflation, whereas their costs, in my estimation, are outpacing it.

I'm using a value multiple of 8, with a longer-term growth expectation of 4.5%, which, given the current figures, seems a bit high. In truth we have seen their earnings per share rise significantly over the last couple of years, so I do expect some continuation.

I'm also giving a negative reduction in the valuation of 10%, and this is because of concerns about slightly higher longer-term energy prices, as well as a concern that higher levels of volatility in the international markets, especially with their US-based travel, is going to hit demand levels potentially in the coming years.

This ultimately gives me a valuation of 579.10p per share, which is a 36.2% value opportunity against the 425.3p on the tear sheet.

On the share price itself: since the results the share price has somewhat recovered. It's by no means at its high point for the year, which was around 494p on 25 June, but it is up over the last nine months in total — 425.3p on the tear sheet against a year-end close of roughly 416p — and up 17.6% year on year at the 440p it reached in mid-August.

VALUATION SNAPSHOT

Assets per share is not populated, so this is an earnings valuation, not an asset-mode one: the growth rate and the multiple both apply. The earnings per share field is in euro cents while the price and valuation are in pence, as quoted in London; the model compares them directly, as it does for all euro reporters.

• Costs outpacing revenue: my five cost lines add about €1.35bn this year against roughly €330m of extra revenue. Revenues are not keeping pace with inflation; costs, in my estimation, are outpacing it.
• The 2027 hedge book: around 40% hedged for 2027, running from 55% in Q1 down to 31% in Q4. If energy prices stay higher for longer, the protection runs down just as it is needed.
• US demand volatility: the North Atlantic is around 30% of capacity, and I would expect further volatility from the US market on a demand basis that other carriers may not experience. Transatlantic travel to the US from Europe may have been affected by the Trump administration and political machinations.
• The smaller airlines: Aer Lingus swung to a €34m operating loss with competitor capacity up 40% in short-haul and 50% in long-haul; Vueling's operating profit halved to €46m. They are struggling on cost and competition, not fuel alone.
• Second-half visibility: booked at 57% of expected second-half revenue — quite a low figure in total, even if the company says it is in line with last year.
• Only 60% recovery of the fuel increase: that is quite a low percentage, and in Q2 the company itself talked about "probably 50%".
• My own growth assumption: the 4.5% longer-term growth expectation in the model seems a bit high given the current figures.
• The war: it has continued to go on for a bit longer than I had anticipated it might do, and the Iranian crisis is leading to higher energy costs.

• Cost control: evidence that they can hold their costs down like other smarter, better operated companies — particularly on the four non-fuel lines that add nearly €790m between them.
• Energy and hedging: energy prices easing, or the 2027 hedge book being built up from around 40% towards the policy ceiling before the current cover runs down.
• Transatlantic demand holding: the North Atlantic numbers have been strong — unit revenue up 7.3% at constant currency, US point of sale up 22% in Q2. If that continues rather than softening, my concern about where it goes from here falls away.
• Aer Lingus and Vueling: a return to profit growth at the two smaller airlines, rather than a €34m loss and a halved profit.
• Revenue and inflation: revenue growth reaccelerating from 1% so that it keeps pace with inflation, instead of costs outpacing it.
• Price weakness: I think there could be weaknesses in the share price in the coming months — that would be the better time to buy I am waiting for.