IAG Q3 operating profit falls €327m despite record revenue

By Amara Osei

IAG posted record third-quarter revenue, up 4.5% from a year earlier, but operating profit fell €327 million to €1.726 billion as fuel prices and flight disruption eroded earnings. The operating margin stood at 17.7%, while Chief Executive Officer Luis Gallego maintained the group’s full-year target of at least 12%.

“We have performed well this quarter despite the headwinds that we and the industry face,” Gallego said. He said passenger yields were positive across all markets, with particularly strong performance on North and South Atlantic routes. Transatlantic demand helped offset higher fuel costs and disruption, but did not erase the profit pressure.

What pushed costs higher?

Chief Financial Officer José Antonio Barrionuevo called fuel the quarter’s largest headwind. Costs rose €565 million as the Middle East conflict pushed jet-fuel prices higher, though hedging provided a partial offset. Passenger revenue added €334 million, and cargo revenue rose €16 million as stronger pricing outweighed lower cargo volumes.

Non-fuel unit costs increased 3.4%, partly because of lower-than-planned capacity, air-traffic-control outages, Heathrow baggage-system failures and engine-related costs at Iberia. Barrionuevo put the underlying increase at about 0.5% after adjusting for those items, higher third-party maintenance and foreign exchange.

Capacity stayed broadly flat, below IAG’s earlier expectation of around 1% growth. Barrionuevo linked the shortfall to continued Middle East disruption and flight cancellations, including those caused by U.K. air-traffic-control problems. Gallego said IAG was removing winter capacity to support revenue and profitability.

The group expects to recover more than 80% of its full-year fuel-cost increase, and more than 100% at British Airways, through revenue measures and other actions to mitigate costs.

Takeaway: Fuel is still the pressure point, but management expects most of the increase to be recovered.

How strong are the network returns?

Passenger unit revenue rose 4.1%, or 4.3% at constant currency. The North Atlantic led with an 11% increase on broadly flat capacity. Latin American unit revenue rose 2.3% despite 5.4% capacity growth.

Every IAG airline posted a double-digit operating margin:

• British Airways: £602 million in operating profit and a 14.4% margin. Unit revenue rose 5.8%, supported by North Atlantic demand and business travel.
• Iberia: €452 million in operating profit and a 19.6% margin while capacity rose 4.4%.
• Vueling: €257 million in operating profit and a 23.8% margin, the highest in the group.
• Aer Lingus: €142 million in operating profit and a 17.4% margin in its seasonally strongest quarter.

IAG Loyalty reported £152 million in operating profit and an 18.9% margin. On an underlying pre-HMRC basis, profit rose more than 13% to £171 million as growth in the core loyalty business partly offset lower holidays profit.

Takeaway: All four airlines and IAG Loyalty delivered double-digit margins, cushioning the group-level profit decline.

What do bookings say about 2027?

Gallego said IAG had secured 85% of expected fourth-quarter bookings. He also reported strong bookings for the first quarter of 2027, while cautioning that the booking cycle remained early. Passenger unit-revenue improvement was running above the third-quarter rate, with Europe strengthening and the North Atlantic remaining resilient.

British Airways Chair and CEO Sean Doyle said business demand was strong in finance and technology and among smaller companies. He said the airline also benefited from connecting traffic between the U.S. and markets such as India as some corporate travelers bypassed Gulf gateways.

For 2027, Gallego said it was too early to settle capacity plans, partly because IAG would resume some Middle East services. In principle, he expects capacity growth below the mid-single digits.

Aer Lingus Chair and CEO Lynne Embleton expects competition to remain challenging next year. Although Aer Lingus was not seeing significant additional transatlantic capacity from competitors in 2027, she said the market still needed to absorb growth from recent years.

Takeaway: Demand improved, but 2027 capacity will stay cautious while the booking cycle remains early.

What changes in cash returns and the fleet?

IAG now expects 12 aircraft deliveries in 2026, down from 16 forecast at the half year. Three Boeing 737s for Vueling and one Airbus A321neo for British Airways moved into 2027. Gallego also said the Boeing 777-9 was now expected in 2028.

The group cut its full-year capital-expenditure expectation to about €3.1 billion from €3.4 billion. Net debt fell to €4.2 billion at quarter-end from €4.7 billion at the half year.

IAG raised its interim dividend per share by 10% and continued its €1.5 billion share buyback. Barrionuevo said the group expected 2026 free cash flow not far from its approximately €3 billion guidance.

The group was not contemplating negative free cash flow in 2026 or 2027. It plans to update investors on its approach to future buybacks in February 2027.

Takeaway: Lower capex and debt supported the cash position, while delayed aircraft shifted fleet additions into 2027 and 2028.

What businesses sit inside IAG?

International Consolidated Airlines Group SA provides passenger and cargo transportation in the United Kingdom, Spain, the United States and other markets. Its services also span aircraft leasing and maintenance, tours, air freight, call centres, ground handling, trustee, retail, IT, finance, procurement, storage and custody, technical assistance, human-resources support, airport-infrastructure development and loyalty programmes.

Takeaway: IAG spans four airlines plus cargo, loyalty and aviation services.