International Consolidated Airlines Group (LSE: IAG) released full-year results on Friday. And never mind the record €7.4bn loss recorded for 2020, the markets loved them. At least, judging by the share price on the day they did. The IAG share price ended the day up 3%, making it the FTSE 100‘s biggest gainer in February.
On Monday, at the time of writing, IAG shares are up another 6%. In the larger scheme of things, mind, we’re still looking at a 57% fall over the past 12 months. That’s even after a strong performance since the start of November’s market upturn. So why the new-found optimism?
The results were bad, for sure. In the final quarter of 2020, IAG’s airlines carried 27% of the number of passengers as in Q4 2019. But you know what? Considering the devastation caused by the pandemic, I’m pleasantly surprised by that. I think passenger numbers could have been a lot worse.
Overall, it looks to me like the big investment firms were fearing the worst too. But much of it was surely already factored into the depressed share price, and the results turned out better than expected. In turn, that gave the IAG share price a nice boost. I have a few rules of thumb, and one of them is that markets overreact to both good news and bad news. Investors usually seem to be too optimistic about positive developments, and too pessimistic when things are going badly.
Positive signs
The success of the firm’s cost-cutting measures have helped soften the damage to the bottom line. And additional funding secured in the fourth quarter has boosted IAG’s liquidity and reduced the fear of the company going bust. Whether that’s enough to justify the latest IAG share price rises will, I think, depend on the wider outlook for the travel business.
The success of the UK’s vaccination rollout is already having a positive effect. IAG told us its first quarter capacity plan still stands at around 20% of 2019 capacity. But that’s subject to review. And it needs to be, with holiday bookings already rising rapidly, especially after the government’s latest update on its plans for easing lockdown.
TUI said that bookings for foreign trips soared 500% overnight. The government does not plan to ease international travel until May at the earliest. But that hasn’t stopped the sun-seekers, and TUI reports soaring bookings for July onwards.
IAG share price good value now?
So should I buy while the IAG share price is still down more than 50% on the year? Well, I generally don’t buy airlines shares, though I do like a nice recovery story, so I’m torn.
For me, the positives would centre on the improving outlook for the travel industry. Covid-19 vaccination has gone a good bit quicker than I’d expected. And the return to being able to fly internationally could be lifted that bit sooner too. Whatever fear I had of IAG going bust is certainly easing.
But on the downside, there’s still nearly £9.8bn of net debt on the books now, which is very close to the company’s market cap of £10.1bn. This Covid-19 thing hasn’t gone away either, and we’re hearing of new variants popping up regularly.
I think I’ll avoid the recovery temptation and stick with “I don’t buy airlines.”
