The IAG share price (LSE: IAG) has had a turbulent couple of years. It hit 684p in January 2020, before falling to 91p over the next nine months. It then more than doubled to 217p by April 2021, as vaccination programs accelerated across the US, UK, and Europe.
But the pandemic’s effect on the FTSE 100 stock lasted longer than many investors thought. By 15 September, it had fallen to 137p. Since then, it’s risen 33% to 183p. What’s going on?
The transatlantic reopening
IAG is the parent company of British Airways, Aer Lingus, and Iberia. Most of its revenue comes from selling tickets on transatlantic routes between Europe and the Americas. And there’s good news on that front. Last week, the US announced that it will be opening up its borders to fully vaccinated travellers by early November. This could send passenger numbers soaring and the IAG share price with it.
But its possible that the global economy won’t be able to support the same number of flights as there were pre-pandemic. Only 235,000 jobs were created in the US in August compared to a forecast of 720,000. And Europe seems set for high inflation and tax rises. Falling disposable income makes leisure flights to the Americas less affordable.
In addition, the recovery of business flights may take some time. HSBC saved £217m last year by slashing its travel budget in half, with CEO Noel Quinn saying that “we’ve learned to live and operate in a very different way.” And as business class seats generate much higher margins, profitability could be hit hard.
IAG reported an operating loss for Q2 2021 of €967m. This is in addition to a $6.3bn loss during the last three quarters of 2020. And when 37,000 staff come off furlough in a few days’ time, the company says costs will “steeply increase.”
It was also running at just 21.9% of 2019 capacity between April and June. However, it hopes this will rise to 45% between July and September, with capacity increasing to 75% by the end of 2021. This target seems achievable to me as competitor Norwegian has exited transatlantic flights.
IAG is also starting a short-haul business operating out of Gatwick, in order to “be competitive in this environment.” But there’s an incredibly competitive market for short-haul flights already. And I don’t think there’s going to be enough demand for luxury flights that last a couple of hours at most.
My verdict for the IAG share price
IAG currently has €10.3bn in liquidity, due to cost-cutting, fundraising, and pension payment deferral. In fact, CEO Luis Gallego is on record saying that “We do not see the necessity to do a rights issue and are not considering it.” So, unlike competitor easyJet, investor concern that IAG would have to “tap the City for emergency funds” can be laid to rest. At least for now.
But the rising IAG share price isn’t worth the risks for me. While the winter outlook for the coronavirus is looking better, the future is still uncertain. However, if the company can hit the targets it has set by the end of the year, I might reconsider the stock.
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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.