British Airways-owner IAG trims capacity outlook; jet fuel bill eases

By Shashwat Awasthi and Joanna Plucinska

LONDON, July 31 (Reuters) - British Airways owner IAG trimmed its 2026 capacity outlook to flat on Friday, after reporting a 16% drop in second-quarter profit hit by soaring fuel costs and weaker travel demand linked to the Middle East conflict.

Shares initially fell around 5% before paring losses to stand down 1.6% at 0850 GMT. The capacity downgrade was offset by quarterly profit coming in just ahead of analyst expectations and a slightly lower fuel bill forecast.

IAG had forecast capacity growth of less than 3% in May.

European airlines have struggled with spiralling fuel costs since the war began at the end of February. IAG's results underscore the pressure and uncertainty highlighted by Ryanair and easyJet this month, as the conflict drives up costs and dampens travel demand.

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.

FUEL COSTS, HIGHER FARES

Still, IAG sought to project stability, and analysts and investors appeared unfazed by the results, with few adjusting their financial forecasts.

"Our strategy is working. Our exposure to different markets and our diverse brands and customer propositions are providing resilience," Chief Executive Luis Gallego said on a media call.

IAG, which also owns Iberia and Aer Lingus, said its fuel costs for the year would be between €8.3 billion and €8.6 billion ($9.6-$9.9 billion), slightly lower than the roughly €9 billion forecast in May.

Air France-KLM on Thursday projected its 2026 fuel bill would be in a similar range, at about €8.9 billion.

All of IAG's airlines were hit by higher fuel prices from March onwards, as fuel costs and emissions charges climbed nearly 23% in the second quarter to €2.22 billion, the company said.

IAG has long relied on demand on its core transatlantic routes, which remain strong with growing capacity and strong bookings in premium for British Airways, the group said.

Still, the conflict in the Middle East has bogged down results. The airline warned on profit and capacity in May.

The company said it was about 57% booked for the second half of the year, with booked revenue in line with a year earlier. It continues to expect to offset about 60% of its higher fuel bill through higher ticket prices and cost-cutting measures.

The carrier reported an operating profit before exceptional items of €1.41 billion for the quarter, down from €1.68 billion a year earlier but slightly ahead of the €1.37 billion forecast by analysts in a company-compiled poll.

United Airlines this month said it would incur nearly $6 billion in additional fuel costs this year due to a renewed surge in oil prices linked to the war, while Ryanair and easyJet have both reported profit hits.

($1 = 0.8692 euros)

(Reporting by Shashwat Awasthi in Bengaluru and Joanna Plucinska in London. Editing by Subhranshu Sahu, Tomasz Janowski and Mark Potter)