IAG's Fuel Recovery Is Real — the Capacity Withhold Is the Tell
Record revenue and a sector-leading margin mask the quieter shift: British Airways is now recovering fuel, while IAG keeps 2027 capacity below mid-single digits.
IAG.MC · Earnings Call · 2026-11-06
The quarter beneath the fuel noise
IAG's Q3 2026 was not a demand surprise. It was a cost-and-fuel quarter. Revenue hit a record, up 4.5%, and operating profit came in at €1.726bn at a 17.7% margin — down €327m year-on-year but still sector-leading. The culprit is obvious: “Fuel was the quarter's biggest headwind with fuel costs rising by EUR 565 million as the Middle East conflict drove jet fuel prices higher, partly offset by our hedging.” — Jose Barrionuevo Urgel, Group CFO · 2026-11-06 The global high fuel costs wave is not unique to IAG; what matters is how much of it management can pass through. The answer is increasingly: more than feared.Nonfuel unit costs rose 3.4%, but Jose Antonio Barrionuevo broke that down carefully: roughly 1.1 points from lower-than-planned capacity due to Middle East disruption, 1 point from higher third-party MRO at Iberia, 0.5 points from one-offs including air traffic control outages and Heathrow baggage failures, and 0.2 points from FX. Strip those out and underlying ex-fuel CASK rose only about 0.5% — against roughly 3.5% inflation in IAG's markets. That is the real operating story: the non-fuel cost machine is still working, even when the reported number looks ugly.
What actually changed: fuel recovery, not a pricing epiphany
The most important shift versus prior calls is measurable fuel recovery. In July, Luis Gallego was still framing pass-through at around 60%: “the pass-through that we expect is around the 60% that we said” — Luis Martín · 2026-07-31. On this call, the group expected full-year fuel recovery of over 80%, and British Airways over 100%. CFO Jose Barrionuevo was explicit: “the pass-through has been -- is going to be around 100%, but you cannot expect the same when you are operating, for example, in the intra-European.” — Jose Barrionuevo Urgel, Group CFO · 2026-11-06 That is a meaningful upgrade from the prior quarter's language. But it is not a blanket pricing-power victory. Management repeatedly warned that the blended number hides different airlines and markets. BA's Q3 pass-through was around 75%; Vueling and intra-Europe remain far more competitive.Still, the direction is clear. BA's unit revenue rose 5.8%, with business revenue up about 14% and North Atlantic even stronger. Sean Doyle said: “business was up about 14% YoY and North Atlantic, in particular, was even stronger.” — Sean Doyle, Executive · 2026-11-06 That is strong pricing in the premium segment, not a broad consumer recovery. The risk is that premium capacity eventually catches up with premium demand. Doyle argued BA's premium seat footprint is broadly similar to 2018-19 after 747 retirements and A380 reconfigurations, which is a credible defense — but one worth monitoring as competitors add premium cabins.
The capacity story management is soft-pedaling
The second change is capacity guidance. IAG now expects 2027 capacity growth of less than mid-single digits:That sounds bland, but it follows a year in which capacity was held flat — not grown — because Middle East flying was pulled and NATS disruption bit. In July, Luis had already said “the full year capacity now is guided flat. The main reason is that we can sell a big part of our operation in the Middle East.” — Luis Martín · 2026-07-31 Now he has a 2027 number. The message: IAG would rather protect unit revenue and margins than chase volume into a fuel-heavy market.in principle, we expect to have an increase of capacity of single digit, mid-single -- less than mid-single digit.
This is the tell. The market sees record revenue and a strong booking book — 85% of Q4 booked, Q1 trends above expectations — and may assume capacity snaps back. Management is saying the opposite. Fleet delays reinforce it: 12 aircraft deliveries this year instead of 16, 737s slipping into 2027, and the 777-9 now expected in 2028. CapEx is being trimmed to about €3.1bn from €3.4bn. That is capacity growth discipline, and it is supportive for pricing — until it isn't.
The weak spot is Aer Lingus. Ryanair has announced roughly 15% more capacity into Dublin next summer, and Lynne Embleton was candid that the North Atlantic remains a difficult competitive backdrop. The Ryanair capacity deluge is not new, but it is intensifying. Aer Lingus has cut head office costs and seen a third of senior managers leave; the transformation is real, but the revenue side still has to absorb years of transatlantic capacity growth. This is a company-specific drag inside an otherwise strong group.
Loyalty, MRO and the new engine optionality
The quieter growth engine is Loyalty business. IAG Loyalty delivered GBP152m operating profit at an 18.9% margin; on the underlying pre-HMRC basis profit rose 13%, with the core loyalty business up 20%. That is high-quality, cash-generative earnings that is not tied to the fuel cycle. It supports the dividend increase of 10% and the ongoing €1.5bn buyback, alongside net debt down to €4.2bn.The genuinely new item is the engine MRO expansion. IAG announced ITOCHU's investment in its engine business and a premier LEAP license at Iberia Maintenance — one of only eight globally. Marco Sansavini framed the scale: “the investment will be of EUR 400 million in the expansion of the business and hiring around 400 mechanics and engineers to develop all the capabilities to basically serve the premier LEAP license.” — Marco Sansavini, Executive · 2026-11-06 The plan moves Iberia Maintenance from about 200 engines a year to at least 350. This is a rare case of an airline group building a capital-light, high-return industrial business inside its MRO arm. It also explains why Iberia Maintenance is suddenly a keyword that matters, after years in which MRO was described as cyclical: in late 2025, Marco said “The engine business is still cycling over the post-COVID phase.” — Marco Sansavini, Executive (likely related to maintenance or engineering) · 2025-11-07 The framing has changed from recovery to expansion.