ii view: IAG suffers record loss, but massive warchest reassures

2020 is a year the airline industry will want to forget, but are the skies brightening up for investors?

Full-year results to 31 December 2020

Chief executive Luis Gallego said:

"Our results reflect the serious impact that Covid-19 has had on our business. We have taken effective action to preserve cash, boost liquidity and reduce our cost base. Despite this crisis, our liquidity remains strong. 

"In 2020, our capacity decreased by 66.5% while our non-fuel costs went down 37.1% thanks to the extraordinary effort across our business. The Group continues to reduce its cost base and increase the proportion of variable costs to better match market demand. We're transforming our business to ensure we emerge in a stronger competitive position.

"We know there is pent-up demand for travel and people want to fly. Vaccinations are progressing well and global infections are going in the right direction. We're calling for international common testing standards and the introduction of digital health passes to reopen our skies safely."

ii round-up:

British Airways and Iberia owner IAG (LSE:IAG) today unsurprisingly reported a full-year loss of €7.8 billion, although outlined a better than expected fourth-quarter performance, driven by its cargo business.

Final quarter revenue of €1.3 billion marginally exceeded City expectations, buoyed by a one-third increase in cargo related sales to €389 million. Expected lower first quarter cash burn compared to the prior period also feed into the mix.  

Shares in IAG, which also owns Air Lingus and Vueling, rallied by more than 4% in UK trading, adding to a gain of over 90% since late October, just before the announcement of vaccine development success in November. Shares for easyJet (LSE:EZJ) are up by a similar amount, while Ryanair (LSE:RYA) is up by just over a third. 

Given the degree of uncertainty, IAG management offer no profit forecasts for 2021, but did outline expectations for current first quarter capacity to be around 20% of 2019 capacity. 

Group liquidity, or cash and borrowing facilities, rose by 11% to €10.3 billion from late September. Additional funding of €3.4 billion was secured in the final quarter of 2020, including €0.2 billion via sale and leaseback transactions at Iberia. 

Capital expenditure for 2020 was cut by €2.3 billion from plans at the start of the year to €1.9 billion. It deferred delivery of 68 aircraft over the year. The dividend payment remains suspended. 

ii view:

Investors in any airline company must be prepared for an often-turbulent ride. Volatile fuel costs, the weather, terrorism and even volcanic ash are some of the factors outside of management’s control and which can impact performance. However, a global pandemic during 2020 has challenged the industry beyond anything seen in its history. A reduction in flight capacity to 20% for IAG during this current first quarter would have been unimaginable just 18 months ago. 

For investors, management’s omission of any 2021 profit guidance sums up the degree of uncertainty still being faced. The cost of passengers self-funding hotel quarantine following a flight to the UK adds another hurdle. With planes still largely grounded across the industry, balance sheet strength is now the focus. 

Like rivals, IAG has taken considerable action over 2020 to conserve cash, bolster its finances and wait out the pandemic. Both UK and US staff pension contributions have now been deferred, as have some supplier payments with their agreement, while industry calls for government help remain ongoing. Vaccination levels for both the UK and the US are proving relatively strong, a key route for British Airways. In all, while a near doubling in the share price since late October should not be forgotten, hope for an end to the pandemic continues to rise. However, investors must be comfortable with the high risk involved.  

Positives: 

• Strong and diverse brands
• Fundraising completed

Negatives:

• Uncertainty pandemic outlook 
• Dividend payment suspended

The average rating of stock market analysts:

Buy