IAG Trims 2026 Capacity as Fuel Costs Bite; Shares Fall 1.6%

British Airways parent company IAG cut its 2026 capacity growth forecast to flat on July 31, down from less than 3% expected in May. Second-quarter profit fell 16% to €1,146 million before exceptional items, hit by soaring jet fuel costs and weaker travel demand linked to the Middle East conflict. Shares initially fell 5% before closing down 1.6% at 0850 GMT. The group slightly eased its full-year fuel bill forecast to €8.3-8.6 billion from roughly €9 billion.

Why IAG cut its capacity outlook

IAG trimmed capacity growth to flat after reporting a 16% drop in second-quarter profit. The Middle East war, which began in late February, sent jet fuel prices soaring and dampened travel demand across European airlines. IAG’s fuel costs for 2026 are now forecast at €8.3-8.6 billion, down slightly from €9 billion but still sharply higher than 2025 levels. CEO Luis Gallego said the group’s diverse brand portfolio and exposure to different markets provided resilience despite the headwinds.

British Airways and premium demand drive results

British Airways, IAG’s largest airline accounting for 45% of group operating profit, delivered strong performance with operating profit rising €44 million year-over-year to £885 million. The airline lifted its margin to 11.9%, boosted by strong premium and corporate demand on the North Atlantic network. IAG Loyalty also performed well, with operating profit rising £48 million to £239 million and margin reaching 19.3%. However, Vueling’s operating profit fell €49 million and Aer Lingus posted a €34 million loss, both hit by fuel inflation and competitive pressure.

Hedging strategy and pricing power

IAG is about 70% hedged for the remainder of 2026 and approximately 40% hedged for 2027, limiting near-term fuel exposure. The group expects to recover around 60% of fuel price increases through pricing and cost actions. Analysts and investors appeared unfazed by the results, with few adjusting financial forecasts. H1 2026 revenue grew 1.0% to €16,064 million, while net debt fell to €4,692 million with leverage at 0.6x EBITDA.

Market context and peer pressure

IAG’s results underscore pressure across European airlines. Ryanair and easyJet reported similar challenges this month as the Middle East conflict drives up costs and dampens travel demand. Passenger revenue rose €828 million at constant currency in H1, though cargo revenue fell €23 million due to suspended Middle East routes. With little sign of an end to the war, many airlines are re-evaluating hedging strategies and tightening cost controls by cutting capacity.

Final Thoughts

IAG’s capacity cut signals caution on near-term demand despite beating profit expectations. With fuel costs still elevated and the Middle East conflict ongoing, investors should watch whether the group’s hedging strategy and pricing power hold up through the rest of 2026.

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