Exceptional Performance, Outstanding Margins

International Consolidated Airlines Group (IAG) is one of the world's largest airline groups. It is the parent company of British Airways, Iberia, Aer Lingus, Vueling, and LEVEL. The group also operates IAG Loyalty, which runs the Avios loyalty programme across the brands.

The main airport hubs are London Heathrow, London Gatwick, Madrid, Barcelona, and Dublin. IAG flies to destinations across Europe, North America, Latin America, the Caribbean, Africa, the Middle East, and Asia Pacific. Revenue is generated primarily from passenger fares, with additional income from cargo and the loyalty programme.

What sets IAG apart from many European airline groups is its exposure to premium long-haul travel, particularly across the North Atlantic, which carries higher yields and margins than short-haul European routes. The group also benefits from fleet diversity and geographic spread across multiple brands, giving it access to different customer segments and markets.

• Operating margin: This measures how much of every euro of revenue is left as operating profit. IAG's operating margin hit 15.1% in FY 2025, up 130 basis points year-on-year. This is an exceptional margin for an airline and reflects strong pricing power and cost discipline.
• Fuel costs: Fuel is typically the single largest cost for an airline. Fuel costs fell 6.9% in FY 2025, which flattered the results. I believe this will bounce back — we are in a period of exceptionally low fuel prices. The fuel hedge for 2026 is only 62%, lower than I would have expected given how cheap fuel is currently.
• Share buybacks: IAG is returning €1.5 billion via buyback — a 7% share concentration (reduction in shares outstanding) in a single year. This is large and directly boosts earnings per share even if profits stay flat.
• Revenue growth: Revenue rose 3.5% to €33.2 billion, driven by a €695 million increase in passenger revenue (+2.5%) and a 16% increase in other revenue (+€414 million). Cargo was flat.
• Net debt: Net debt came in at €5,948 million — €1.45 billion better than Deutsche Bank's estimate of €7.4 billion. This is a substantial beat and gives the company meaningful financial flexibility.
• Depreciation costs: These increased 11.2% year-on-year. I'm always mindful that depreciation costs are somewhat at the discretion of the company — a change in assumptions around aircraft useful lives or fleet valuations could move these significantly. This warrants monitoring.

The CEO calls this "another year of exceptional performance with outstanding margins and superior return on capital." The language is justified. Operating profit came in at €5,024 million, bang on expectations (versus €5,010 million expected). Fourth-quarter operating profit of €1,093 million beat estimates by 1.5%.

Key financials

Much of the diluted earnings per share growth is genuine operational improvement rather than financial engineering.

Revenue breakdown

On costs, employee expenses rose 3.6% — relatively good. Fuel costs fell 6.9%, which I'd expect given the current environment, though I believe this will bounce back; we're in a period of exceptionally low fuel prices. Non-fuel unit costs are guided down minus 1% for 2026 — not dramatic but at least not rising.

One area that gives me concern: depreciation costs increased 11.2% year-on-year. I'm always mindful that these costs are somewhat at the discretion of what the company decides (and could be used as a way of improving profitability in the short term). A change in assumptions around aircraft manufacturing or fleet valuations could cause these to increase sharply.

Net debt came in at €5,948 million — €1.45 billion better than Deutsche Bank's estimate of €7.4 billion. That's a quite substantial beat. Fuel hedging for 2026 sits at only 62%, lower than I'd have anticipated given how low fuel costs are currently. I'd have expected them to lock in more at these levels.

The company is returning €1.5 billion via buyback — a 7% share concentration in a single year. That is large. Bang on expectations, so the market won't be surprised, but should be viewed positively. Dividends per share grew 8.9%.

The share price is up 35% over twelve months, already +10% year-to-date. Reasonably good trajectory, but concerning it's risen 10% in two months. Short interest at 2.6% — not alarming but surprising it's as high as it is.

I'm using 10% growth. Actual profitability growth was 22%, but the 7% share concentration this year leaves just 3% underlying growth implied. That seems conservative — arguably my growth assumption isn't high enough.

Valuation drivers

Valuation snapshot

• Fuel costs likely to rise: FY 2025 benefited from a 6.9% fall in fuel costs. This is unlikely to persist — we are in a period of exceptionally low fuel prices. The 2026 fuel hedge is only 62%, leaving significant exposure to a price rebound.
• Depreciation costs rising 11.2%: A large and accelerating increase in depreciation warrants close monitoring. A change in fleet valuation assumptions or aircraft useful lives could cause further step-changes in this cost line.
• Short interest at 2.6%: While not alarming, it is surprising this is as high as it is given the strong results. It suggests some investors are positioned for a pullback.
• Share price already up 35% in twelve months: A significant portion of the value opportunity may already be reflected in the price. Rising 10% in two months alone is concerning from a near-term entry perspective.
• Airline sector sentiment: Broader negative sentiment around airline stocks could weigh on IAG regardless of its own strong operational performance.
• Geopolitical and macroeconomic risk: Airlines are exposed to global events that can disrupt travel demand — conflicts, pandemics, recessions, and currency movements all pose risks.

• Fuel cost spike without hedge protection: If oil prices rose sharply and IAG had not increased its hedge position, margin compression could be significant.
• Operating margin falling below 12%: A meaningful reversal in the margin trajectory would signal that the current performance is cyclical rather than structural.
• Buyback programme reduced or cancelled: A withdrawal of the €1.5 billion annual buyback would remove a key driver of earnings per share growth.
• Revenue per available seat kilometre declining: A sustained drop in passenger yields would suggest pricing power is weakening.
• Short interest rising above 5%: A material increase in bearish positioning would warrant investigating what the shorts are seeing.