International Airlines Group (IAG) has this morning announced a large drop in profitability as higher fuel costs and non-cash charges compensated for an improvement in passenger yields as airlines reduced capacity in response to the adverse economic environment.

The company incurred in losses before tax for the year of €997m (£862.89m), versus €503m one year ago. Those were the result of a 20.4% increase in fuel oil costs and emission charges to €6.1bn from €5.068bn one year ago.

Dollar strength takes its toll

Fuel unit costs up 16.8%, or 8.4% at constant currency. Of possible interest, the carrier also explained how it is negatively exposed to strength in the dollar as it has more costs denominated in that currency than revenues.

Total exchange rate impacts resulted in a net adverse effect on IAG´s operating loss of €107m.

As well, the company incurred in a restructuring charge of €202m for the Iberia transformation plan and €343m of impairments of Iberia´s intangible assets

Even so, after exceptional items the operating loss for the year - not including Iberia´s restructuring and impairments was €68m - compared to company guidance in November of €120m, the company explained.

Before exceptional items, British Airways made an operating profit of €347m in the year to December 31st and Iberia made an operating loss of €351m.

Revenue for the year was up 10.9% to €18,117m, including €872m or 5.4% currency impact.

Passenger yields in terms of revenue per passenger kilometre rose by 7.6% to 8.73 euro cents.

Cash at the end of the year was €2.9bn, down by €826m. Group net debt increased by €741m to €1.9m.

The company invested €1,239m during the year, versus €1,071m in 2011, including over €400m on pre-delivery payments for future aircraft.

Tender offer for Vueling authorised

Just before the opening bell the company also announced that Spain´s market regulator had authorised its tender offer for Iberian low cost carrier Vueling.

As regards the company´s outlook, Chief Executive Willie Walsh said that: "the outlook for 2013 will be impacted by the outcome of the Iberia transformation plan negotiations, and any associated costs and losses. Subject to these, we would expect a better pre-exceptional operating result to the one achieved in 2011."

For their part, and commenting on the figures analysts at Investec said that: "IAG has reported a 2012 fiscal year loss that is lower than guidance and our expectations. Continued yield (+8% year-on-year) and load factor (+120bps) strength have offset higher unit fuel (+17%) and underlying (+9%) costs.

We welcome the aggressive tone being taken by the management on Iberia ('must adapt to survive') and we are encouraged by the continued strength of trading at British Airways. Iberia strikes are likely to continue, but we see Willie Walsh winning the battle on driving the required turnaround and we retain our BUY."

Before the opening bell shares of IAG were being called to rise by 2%.

AB

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