Interactive Investor

IAG stuck in a holding pattern

5th November 2021 08:03

Richard Hunter from interactive investor

The situation is slowly improving at the British Airways owner, but investors still need to buckle up for the long haul.

Following a loss of €452 million in the quarter, which compares to a figure of €1.9 billion in 2020, the projected operating loss for International Consolidated Airlines Group's (LSE:IAG) full year now stands at €3 billion. Cash operating costs for the third quarter were €260 million per week, underlining the need for the airline to return to some kind of normality as soon as possible.

A cocktail of borrowings which have been necessary to keep the company afloat has resulted in a net debt figure which now stands at €12.4 billion. Revenues were slightly below expectations for the quarter at €2.71 billion, although this marked a strong improvement from the previous year’s number of €1.22 billion.

IAG’s actions have been decisive and significant, but inevitably these come at a cost which will overshadow the airline for some time to come. The business remains in reasonable shape given a cocktail of borrowings and other measures, such as the deferral of UK pension contributions, which have given IAG a fighting chance. Access to liquidity at the end of the quarter was a healthy €10.6 billion, and has since improved to €12.1 billion as at the end of October.

In terms of maximising the limited revenue opportunities, the company has also been concentrating on cargo flights. The third quarter numbers showed an improvement of 37% on last year, and now stands at 73% of pre-pandemic levels, achieved despite less flights as more traditional passenger flights began to recover.

Passenger capacity, which stood at 22% of 2019 levels in the second quarter, improved to 43% in the third and is expected to recover further in the final quarter of the year to 60%. 

Perhaps most importantly, the reopening of the transatlantic travel corridor will provide IAG the chance to showcase what it does best, including its focus on premium service. This could be a pivotal moment in the airline’s recovery, particularly given that the seasonal boost of the summer season did not materialise.

Indeed, the company is now predicting a return to profitability in 2022 and, in the meantime, operating cash flow turned positive this quarter for the first time since the beginning of the pandemic. The share price is reflective of not only what has been achieved but also what still needs to be done. Although the shares have risen by 65% over the last year as compared to a rise of 23% for the wider FTSE100, on a two year view they remain down by 53%. 

As such, the company remains firmly in the camp of a recovery play, which in turn has attracted the attention of investors still keen on IAG’s prospects. The market consensus of the stock as a strong buy suggests that IAG may soon be breaking out of its current holding pattern.

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