The IAG (LSE: IAG) share price is up over 7% so far in 2021. But during the last 12 months, the stock has increased almost 30%. The coronavirus crisis has really hit airlines hard, but does this rise suggest there is light at the end of the tunnel?
Maybe. But the easing of Covid-19 travel restrictions and the vaccine rollout are just the start of the recovery. But the company has a long way to go to reach its pre-pandemic levels. I don’t think the IAG share price can rise further in 2021. And here’s why.
Challenging times
It’s a challenging time for the FTSE 100 company. Long haul travel is still facing a tough climb. Last month’s interim results revealed that passenger capacity for its second quarter operated at a dismal 21.9% of 2019’s levels. It continued to be hit by Covid-19 government restrictions and quarantine requirements.
I don’t think this going to improve dramatically any time soon. IAG expects passenger capacity for its third quarter to be around 45% of 2019’s volume. This isn’t even half of pre-pandemic levels , which I find somewhat worrying. And even the company is uncertain about this and says that this plan is subject to ongoing review.
The management team is doing everything in its power to survive this difficult period. It has boosted the amount of cargo-only flights to make up for the decline in passenger revenue. So it’s no surprise that this led to record cargo sales for the six-month period.
But the outlook isn’t too rosy. The board is unable to provide profit guidance for 2021. This is due uncertainty over the timing of the lifting of government travel restrictions as well as the continued impact and duration of Covid-19
Debt
IAG isn’t at risk of running out of cash any time soon though. At the end of June it had €10.2bn in liquidity. But this has come at the expense of a soaring debt pile and even deferring its pension payments.
Net debt at the end of its second quarter was €12.1bn compared with €9.8bn in December. Clearly, this has increased by a significant amount. And my concern is that if IAG suffers another year where its fleet of planes remain on the tarmac, then its liabilities could soar even further.
This could mean that the debt position may place a burden on future growth. Especially with chunky interest payments. And I reckon this could place pressure on the IAG share price going forwards.
Bright side
The increase in the share price is likely to depend on the recovery of British Airways. It’s worth noting that this is a strong brand with a lot of history. Pent-up demand to travel especially for long-haul trips is likely to be high. Once the Covid-19 travel restrictions fully ease, British Airways could see a pick-up in sales.
Should I buy?
But I’ll only be monitoring the IAG share price for now. I think there are too many unknowns that could impact the stock. As I said, a recovery in the shares is dependent on the performance of long-haul travel and the key unit, British Airways. Another catalyst is likely to be the reopening of transatlantic flights. So I’ll be watching closely rather than buying.
