Airlines have been a huge casualty of the coronavirus pandemic. British Airways owner International Consolidated Airlines Group (LSE: IAG) is no exception. While the FTSE 100 has fallen by about 20% so far this year, the IAG share price is down by more than 65%.
However, experienced investors and company bosses know that you should never waste a good crisis. I don’t want to be insensitive to the human cost of this pandemic, but I do think it’s an opportunity for airlines to become leaner, greener, and more efficient.
Long-haul benefits
Over the next few years, I think we’ll see some winners and losers emerge from the current turmoil. Airline fleets will get smaller and fuel-hungry older aircraft will be scrapped.
Will IAG shares be a long-term winner in this scenario? I can see some reasons why they might.
The group’s bias towards long-haul flights means that it has no realistic competitors in terms of alternative means of transportation. I think this could become an important factor if EU governments take serious action on climate change.
For example, Air France’s recent state-backed bailout apparently includes a clause requiring the airline to phase out flights of less than 2.5 hours, as these compete with high-speed trains.
Strong brands could support IAG shares
IAG also has several strong brands. British Airways, Iberia, and Aer Lingus are all flag carriers in their respective home markets. These airlines face intense competition from budget airlines on short-haul routes, but enjoy much greater customer loyalty in long-haul markets.
Newer aircraft and better service could improve these airlines’ reputation with business travellers and help rebuild the IAG share price.
Of course, this depends on business travellers returning to the skies when travel restrictions end. I think they will. If I’m right – and British Airways premium cabins fill up again – then I think we could see IAG shares recover more quickly than anyone expects right now.
Could IAG go bust?
IAG is planning to start flying from July, but doesn’t expect passenger numbers to return to 2019 levels until 2023. Management are planning to defer the delivery of 68 new aircraft and British Airways alone is expected to cut 12,000 jobs.
However, I don’t think that the airline group is in any immediate danger of going bust. Weekly costs have been cut to €200m during lockdown and IAG had €10,000m of cash and undrawn credit available at the end of April. That should be enough, in my view.
The IAG share price looks tempting to me
At the time of writing, the IAG share price is around 200p. This gives the business a market value of about £4bn, which is around 30% below its December 2019 net asset value of €6bn.
Of course, selling aircraft is pretty difficult at the moment. I’d guess that that used aircraft prices have fallen sharply. But in my view, IAG’s heavily discounted valuation suggests that investors are pricing in a very gloomy outlook.
I think this might be too harsh. Historically, IAG’s profit margins have been above average. British Airways also controls a valuable portfolio of long-haul slots at Heathrow, and has few competitors on some routes.
I think there’s probably some value here. If you can handle the risk and uncertainty, I think the IAG share price looks tempting at this level.
