After a pretty awful 2020 that saw the airline post a €6.9bn loss, the IAG share price has made some progress this year. However, since the company posted its full-year numbers back in February, the shares have struggled to gain much in the way of altitude, and today’s Q1 update looks set to heap further gloom on its Q2 prospects.
IAG share price fails to take off
IAG's share price is largely unmoved in early trading, with investors well aware of the industry's ongoing troubles in the face of contiuned outbreaks of Covid-19 in certain part of the world. Although the shares remain well below early 2020 highs over 400p, they have managed a partial recovery from the wrong side of 100p, and since March have largely remained above the 200p level.
In Q4 alone the company posted an operating loss of €1.47bn, which when extrapolated into the full-year figures, saw the airline slump to a loss, after tax and exceptional items, of €6.9bn, with most of that loss coming in the form of €3bn on hedging losses on fuel that was never delivered, as the airline was unable to use it, and writedowns on the value of its fleet.
Passenger capacity falls again
For Q1, IAG estimated that capacity plans would be around 20% of 2019 levels, in essence meaning that it was expected to be worse than the final quarter of last year. This has turned out to be the case with passenger capacity coming in at 19.6%.
Dig a little deeper and the internals are equally as stark, with revenues sliding to €968m, a decline of 79%, and a loss after tax of €1.12bn, and while the airline is slightly more upbeat about the next few months, a return to normal for international travel still looks a long way off.
For Q2, IAG is slightly more upbeat about passenger numbers, but it’s such a low bar to be almost inconsequential, with 25% capacity of 2019 levels planned at a time when restrictions are set to get eased significantly compared to Q1.
Revolving credit facility
The slow pace of reopening is only likely to put further strain on the company’s finances, so it's just as well IAG managed to agree a new $1.8bn three-year revolving credit facility in March, secured against take-off and landing slots at Heathrow and Gatwick airports. In doing so the airline has improved its total facilities by around $400m, as it looks to reinforce its balance sheet further against the prospect of international restrictions being in place for longer than was envisaged back in January.
Later this month, the UK government is set to implement a traffic-light system for overseas travel, with only green light countries not requiring travellers to quarantine, which means that disincentives to travel to amber countries, as well as red list countries, are likely to remain high. Airlines seem optimistic that most of Europe could make it on the green list, however that seems a big ask at the moment given how far behind a lot of European countries are in their vaccination programmes, and also assumes that in their rush to reopen we don’t see new variants or further waves. Then of course IAG has the added complication of being exposed to the wider international travel markets in Asia and the US, which domestic carriers like easyJet and Ryanair don't fly to.
Travel corridor hopes
As an international carrier, IAG is uniquely exposed to markets for international travel, and while it does have a domestic base, with its Iberia and Aer Lingus brands, which could benefit from a pickup in short-haul flights, long haul is where the bigger margins can be usually found. Further delays here will only put more strain on its finances. The recent talk of a US/UK travel corridor for vaccinated people is very welcome news if it comes to pass, and it is here that IAG will be pinning a lot of its hopes this year. Travel corridors are likely to be the next big discussion topic for airlines, along with vaccine passports as potential losses for the year get revised upwards, with IAG CEO, Luis Gallego, referencing those very points in today’s update
Only three weeks ago, IATA upgraded its deficit estimates for 2021 from $38bn to $48bn for global airlines, as it became apparent that further new outbreaks in India and Brazil had the potential to spread further afield. These outbreaks may make governments of countries that are doing well on the vaccination front much more cautious about opening up their economies, in case they risk importing new variants.
This could mean Asia markets, and more specifically red and amber list countries, remain off limits to international travel for at least another six months. This remains the real risk for all international carriers, and not just IAG. As a result, IAG's share price could remain grounded well below pre-pandemic highs for a while longer.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.