British Airways owner IAG expects lower capacity in 2026 as fuel costs bite

By Joanna Plucinska

Nov 6 (Reuters) - British Airways owner IAG on Friday forecast its annual capacity would be slightly lower this year, the first decline since 2022, as flight disruptions in the Middle East due to the Iran war and other regional conflicts weighed on operations.

The airline operator, whose other brands include Aer Lingus and Iberia, reported third-quarter operating profit before exceptional items of €1.73 billion ($1.94 billion), missing analysts' consensus of €1.81 billion, as the global aviation sector struggles with rising fuel costs stemming from the war.

Still, the carrier focused on the success of its premium strategy. "We continue to see strong business demand, particularly in North Atlantic and domestic regions, Asia Pacific, South Asia ... they are benefiting from customers (who)are trying to avoid the Middle East," IAG Chief Executive Luis Gallego told reporters on a press call.

IAG shares drew a mixed reaction, see-sawing up and down around 1% in early trade. Goodbody analyst Dudley Shanley said the market is likely to be disappointed by IAG's reported mix of higher revenue and higher costs.

EARLY 2027 BOOKINGS POSITIVE

With little sign of an end to the war, many airlines are ​re-evaluating their hedging strategies and tightening cost controls, with many cutting capacity.

Europe's big carriers, including Air France-KLM and Lufthansa, proved to be more resilient in the third quarter than budget players like Ryanair as they capitalise on ambitious investments into premium products that target wealthier consumers to recoup higher costs associated with fuel.

However, IAG, which also owns budget carrier Vueling, said 85% of expected seats available for the fourth quarter have been booked, with numbers for the first quarter of 2027 looking strong.

It expects its total fuel cost to be €8.9 billion for the year, with IAG currently 45% hedged against volatilities for 2027 and 71% hedged for the remainder of 2026.

IAG executives said they expect their hedging programme to absorb a large portion of the upcoming fuel price increase into next year.

($1 = 0.8930 euros)

(Reporting by Joanna Plucinska in London and Yamini Kalia in Bengaluru; Editing by Subhranshu Sahu and Susan Fenton)