International Airlines Group [IAG.LSE] looked to be part of the post-pandemic recovery story after its share price took off late last year, as successful Covid-19 vaccine trials spelled good news for the travel sector. Since spring, however, IAG’s share price has stuttered, as the threat of further restrictions cloud the horizon. With IAG’s share price hanging in the balance, the release of the British Airways-owner’s Q3 results will be one to watch this Friday.
IAG share price has rebounded, but uncertainty hangs over airlines
IAG’s share price is currently cruising at around 165p, up 70% over the past 12 months – but that is only part of the story. While the successful rollout of the vaccine programme earlier this year helped improve the outlook for airlines after Covid-19 left planes grounded, market jitters have recently returned. IAG’s stock is up only 10% year-to-date, having lost about a quarter of its value after reaching a 52-week high of 222p in intraday trading on 16 March, as cases of new variants increased and the threat of fresh travel restrictions weighed on airlines’ recovery. On top of the virus risk, the double whammy of higher airport charges and fuel prices are making air travel more expensive, which could deter some passengers from returning to the skies.
In brighter news for IAG, its share price edged higher on 1 November after its British Airways operation announced that it had agreed a credit facility with UK Export Finance said to be worth £1bn over five years. This is on top of a £2bn facility that was agreed at the end of 2020, and drawn in March.
Market conditions causing turbulence for flight operators
The business environment remains a challenge for IAG, as it does for most airlines, though the announcement in September that the US plans to reopen its borders to vaccinated UK and European travellers from November offered a few rays of optimism. Indeed, when IAG reported its half-year results at the end of July, it cushioned the blow of an operating loss of $2.18bn by highlighting the reopening of the transatlantic travel corridor as a positive development for the months ahead. Across the industry it was hoped that the lifting of overseas travel restrictions would provide a much-needed fillip to airlines looking to ramp up capacity to meet pent-up demand. Unfortunately for the airlines, they’re not out of the woods just yet, as highlighted in the UK by talk of “Plan B” – the possible introduction of new coronavirus restrictions if infection rates rise over winter – which has dampened enthusiasm around air travel.
Unsurprisingly, IAG’s CEO Luis Gallego declined to offer a financial outlook for the second half of the year, citing uncertainty over travel restrictions and the ongoing impact of Covid-19. Although consumer confidence in air travel continued to be patchy at best, and in parts of Asia rising infection rates had already brought fresh travel restrictions, IAG said that Q3 flight capacity would rise to 45% of pre-pandemic levels. It will be interesting to discover whether this target was met when the company announces its Q3 results.
Caution remains the watchword amid uncertain outlook
IAG will undoubtedly be keen to get back on the path to recovery as soon as possible, but as the introduction of new travel restrictions remains a risk, many would-be travellers are likely to adopt a cautious approach towards the prospect of air travel for the time being. Factor in higher airport chargers and fuel costs, plus pandemic-era debt, and business headwinds seem likely to persist for the likes of IAG. That said, IAG’s share price recovered largely thanks to the vaccination programme and economic reopening, and further medical breakthroughs cannot be ruled out. The weeks and months ahead should shed more light on the future of the aviation sector, starting with the release of IAG’s Q3 earnings at 7am on Friday 5 November.