ii view: IAG follows rivals and cuts winter capacity

A quarterly loss of over one billion euros follows management changes. Should investors board or jump?

Preliminary third-quarter results to 30 September

• Revenue down 83% to €1.2 billion
• Loss of €1.3 billion versus a profit of €1.4 billion in Q3 2019
• Liquidity of €9.3 billion

Guidance:

• Four-quarter capacity to be no more than 30% compared to Q4 2019

ii round-up:

British Airways and Iberia owner IAG (LSE:IAG) reported a third-quarter loss of €1.3 billion as it moved to cut winter season capacity following a retightening of pandemic restrictions across many European countries. 

The reduction from 40% to 30% of last year’s final-quarter capacity follows in the wake of other airlines including easyJet (LSE:EZJ) and Wizz Air (LSE:WIZZ). The billion euro-plus loss exceeded City expectations of nearer €900 million. 

IAG shares fell by over 3% in early UK trading, although later recovered to trade marginally higher. The former national airlines shares are down over 70% year-to-date. Air France-KLM (EURONEXT:AF) shares are down by a similar amount, while easyJet shares are down just over 60%. Ryanair (LSE:RYA) shares are down less than 15% in 2020. 

Given reduced operations across its usually busy festive season, IAG, which also owns Air Lingus, Level and Vueling, no longer expects to reach breakeven in terms of net cash flow from operations in the fourth quarter.

Earlier in October it replaced its British Airways boss with the head of subsidiary Air Lingus. The move followed the September change at the top of IAG to Luis Gallego from the previous incumbent Willie Walsh. 

Group liquidity and following a €2.74 billion shareholder fundraising is now over €9 billion. Measures to combat Covid-19 and conserve cash have included staff lay-offs, suspending the dividend payment, and deferring the delivery of new aircraft. 

ii view:

Investors in any airline company must be prepared for an often-turbulent ride. Volatile fuel costs, the threat of terrorism and industrial action by staff can all hit hard. But the Covid-19 pandemic has taken hardship to a new level, grounding aircraft fleets for months. 

For investors, substantial action has also been taken to conserve cash. The recent shareholder fundraising now gives the airline total liquidity in excess of €9 billion. That equates to an estimated nine months of liquidity. Negotiations to try and reduce the €1 billion purchase price of Air Europa back in late 2019 are also thought to be taking place, while industry calls for government help are ongoing. But despite a savaging of the share price year-to-date, the degree of uncertainty for the outlook remains huge, with IAG shares still one only for the very brave.   

Positives: 

• Strong and diverse brands
• Fund raising completed

Negatives:

• Uncertainty pandemic outlook 
• Dividend payment suspended

The average rating of stock market analysts:

Buy