British Airways owner sacrifices fare gains in US route battle

Bloomberg

British Airways owner IAG SA struggled to raise ticket prices at the same pace as rivals as the airline group boosts long-haul budget options to counter tougher competition on its core US routes.
Gains in passenger unit revenue, a measure of ticket pricing, slowed to 2.2 percent in the third quarter from a 4 percent jump in the three months through June. The increase was less than half the growth rate at Deutsche Lufthansa AG.
“There may be an adverse short-term reaction to the unit revenue trend,” with weakening pricing for North America and a poor comparison versus Lufthansa, Gerald Khoo, an analyst at Liberum Capital Ltd., wrote in a report to clients.
IAG is responding to fast expansion at rival discount long-haul operators, including Norwegian Air Shuttle ASA and Lufthansa’s Eurowings division, by adding cap
acity at Dublin-based Aer Lingus and the new Level low-cost brand, which flies to the US from Barcelona. It’s also tasked British Airways with reducing costs
while investing in more seating
to boost the network carrier’s
competitiveness.
The measures led to a 3.1 percent drop in pricing on North American routes in the quarter, according to an IAG statement.
IAG shares fell 4.9 percent to 637 pence in London. The stock, which has been trading at 19-year highs in recent weeks, is up 44 percent this year, valuing the company at 13.1 billion pounds ($17.2 billion).
“The thing I keep saying to people is that unit revenues are only one half of the picture,” Chief Executive Officer Willie Walsh said on a conference call.
“The unit cost is the other part, and clearly both Level and Aer Lingus have very efficient cost performance on the trans-Atlantic.”
Full-year earnings excluding one-time items and shifts in fuel costs and exchange rates will rise 18 percent this year to about 3 billion euros ($3.5 billion), London-based IAG said, confirming earlier guidance of a double-digit jump.
Third-quarter operating profit increased 21 percent as demand improved on routes from Latin America, the Caribbean and the Asia-Pacific region.
Fares at European carriers have generally started to improve after price cuts encouraged by the slump in fuel costs drove weaker companies including Alitalia SpA, Air Berlin Plc and the UK’s Monarch Airlines into insolvency this year.
IAG, which is looking at picking up Monarch’s takeoff slots at London Gatwick airport, has already expanded its Spanish short-haul budget carrier Vueling into Italy to gain market share, Walsh said.