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Stock Watch

Will the EU travel ban ground the IAG share price?

IAG share price: an airplane in flight

The EU has moved to restrict flights from the US amid a sharp increase in cases of the Delta variant. The bloc voted on Monday 30 August to tighten border controls for non-essential travel. 

The ruling saw the International Consolidated Airlines Group or IAG [IAG.L] share price drop 4.7% in the week of trading following the ruling, closing at 155.80p on 3 September, its lowest price since February. 

Other European airline stocks that run long-haul flights took a slight nosedive too in response to the news. The Air France-KLM share price closed the week 2.7% lower and Deutsche Lufthansa fell 5.3%.

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Turbulent times for IAG’s share price

The near-term outlook for the IAG share price has been bumpy for some time. While, at the close on 6 September, the IAG share price was up 80.7% from its 52-week low of 86.54p, set on 25 September 2020, the stock is down 2.1% year-to-date. It has struggled to take off largely because of rising Covid-19 infection rates, slowing vaccine roll-outs and UK and EU nationals remaining barred from entering the US.

The resulting drop in passenger numbers in the last 18 months has meant the company has had to go on a cost-cutting and fundraising spree. 

For the six months to the end of June, IAG posted a loss of €2.048bn, down 46.3% from the €3.813bn loss posted in the first half of 2020. Net debt was up 24% from €9.762bn to €12.107bn, and passenger revenue slumped 72.3% from €4.113bn to €1.141bn. 

In the first half of last year, British Airways brought in €2.566bn in ticket sales or 62.4% of total passenger revenue, while Iberia had the second-biggest share of 19.1% with revenue of €784m. However, in the first half of this year, British Airways brought in €424m, a 37.2% share, while Iberia had sales of €470m, a 41.2% share. 

IAG’s exposure to long-haul, transatlantic travel and dependency on British Airways has been responsible for the worst of the company’s losses. And now the situation has been compounded by the EU’s move to restrict travel from the US.

Though the ruling isn’t binding and the EU is only advising member states to impose restrictions, the uncertainty of how many European borders might be closed to US citizens, and for how long, means flights are unlikely to be at full capacity in the near term. It also means the IAG share price is less likely to head for the clouds any time soon. 

Medium-term recovery on the horizon?

Despite the current headwinds, IAG’s share-price prospects could take flight in the long term, according to market experts and analysts.

The team at JP Morgan Cazenove admit it’s difficult to predict when air traffic will recover, but continue to recommend the stock to long-term investors.

“IAG has taken radical action to cut costs, and this underpins our view that it can achieve attractive EBITA margins once the market begins to normalise, which we do expect in the next few years,” read a note to clients reported by Proactive Investors.

Gerald Khoo, an analyst at Liberum Capital, told This is Money that the post-pandemic recovery won’t be straightforward. “But we are confident air travel will make a convincing recovery in the medium term, and IAG remains a structural winner.”

In the short term, Khoo argued, IAG’s position is strengthened by its cash position, which has been aided by its cost-cutting and fundraising efforts. At the end of June, the company had €7.664bn in cash, which was €1.747bn higher than at the end of December 2020. 

 

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