International Consolidated Airlines (LSE: IAG) shareholders finally have something to cheer. In just a week, the IAG share price has climbed 21%. So is this finally the start of the recovery that everyone has been waiting for?
The British Airways owner had successfully negotiated a new financing package that has kept it going through the Covid-19 crisis. But just about every investor has surely still had, at the back of their mind, the fear that even more new cash would be needed. Two pieces of news in recent weeks has strengthened those fears, at least in my mind.
One is the latest estimate from Boeing that the aviation market will not get back to pre-pandemic volumes until late 2023 or early 2024. To make it worse, the US aircraft maker reckons short-haul flying will lead the way, with long-haul routes taking the longest to get back to normal. That would be especially bad for International Consolidated Airlines, which concentrates on the long-haul business.
The second shock came from easyJet. The company also raised a lot of new cash to keep it in reasonable health during the crisis. And again we’ve been hoping for a return to steady cash flow before the company’s current liquidity starts to dry up. Unfortunately, those hopes have been dashed.
More cash needed
The budget airline, on 9 September, revealed a new rights issue to the tune of £1.2bn. And it has secured a new $400m revolving credit facility. At the same time, easyJet revealed that it had rebuffed a preliminary takeover approach. The shares tanked, and are still down 38% over two years.
That’s still a lot better than the IAG share price, mind. IAG suffered a 64% crunch in the same two years. But is it finally on the way back up now? The latest gains got a boost from a story in The Sunday Times. In it, IAG’s chief executive Luis Gallego said “We do not see the necessity to do a rights issue and are not considering it.”
That, it seems, has addressed my biggest concern. So is this now the best time for me to buy IAG shares since the start of the pandemic? Trying to weigh up the competing factors is not easy. On the one hand, the liquidity situation looks safe. But on the other, a strong long-haul market still seems some way away.
IAG share price valuation
The only thing I can think to do is ignore all that, and try to get a handle on the company’s current valuation. Once IAG does get back to full strength, the valuation should be close to pre-pandemic levels, shouldn’t it?
I’ve made a rough calculation of IAG’s enterprise value. And it has barely changed since February 2020. With a couple more years of uncertainty ahead, I’d be hoping for a significantly lower valuation today before I’d buy.
Still, there is one upside that my approach misses. In the days before the pandemic grounded our airlines, the IAG share price was on a bit of a bull run and was looking reasonably attractive. So maybe the company’s valuation back then was actually too low. But with all the uncertainty in the air, I will steer clear.
