IAG Earnings: Record Margins, Premium Durability Extends Valuation Horizon; Fair Value Up 18%

Key Morningstar Metrics for International Consolidated Airlines Group

• Fair Value Estimate
  : GBX 483
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : High

What We Thought of International Consolidated Airlines Group’s Earnings

IAG delivered another record year, with operating margin at 15.1%, return on invested capital at 18.5%, and free cash flow of EUR 3.1 billion after EUR 3.4 billion in capital expenditure. Revenue rose 3.5% to EUR 33.2 billion, with passenger unit revenue broadly flat and capacity up 2.4%.

Why it matters: IAG’s 15% operating margin sits at the very top of management’s stated through-cycle range of 12%-15%, confirming a structural profitability reset. Shares fell about 6% as investors weighed higher future capital expenditure, fuel volatility, and foreign-exchange risk against record earnings and a new EUR 1.5 billion buyback.

• Profit growth was mix-led and cost-led rather than yield-driven. Passenger unit revenue rose only 1%, with softer US-origin economy demand offset by resilient premium traffic. The North and South Atlantic remain core profit pools.
• Total unit costs declined 0.4%. Nonfuel unit costs rose just 1% at constant currency, while fuel fell 9.1% despite higher carbon costs. Operational execution at British Airways and Iberia continues to lift structural margins.

The bottom line: We raise our fair value estimate to GBX 483 from GBX 410, extending our assumption that premium yields on North and South Atlantic routes remain above 2019 levels through 2028, versus 2026 previously, as capacity constraints persist and premium demand stays firm. Free cash flow remains resilient despite higher capex and environmental costs.

• Original equipment manufacturer and engine bottlenecks are expected to continue to constrain global supply in the short term, with new orders increasingly used for replacement rather than growth. This supports yields and keeps IAG’s 12%-15% margin target range credible through the cycle.
• A step-up in capex from 2027 through 2031 is manageable given 0.8 times leverage and EUR 10.9 billion liquidity, allowing fleet renewal while remaining free cash flow positive and potentially tightening supply versus weaker peers.