The IAG (LSE:IAG) share price soared 6% last Friday on the back of some pretty encouraging results. This latest jump has pushed the stock’s 12-month performance firmly above a 70% return.
It still has a long way to go before returning to pre-pandemic levels. But this is definitely a step in the right direction. So let’s take a closer look at what the group has been up to and see whether I should be considering it for my portfolio.
The IAG share price versus earnings
As a quick reminder, International Consolidated Airlines, or IAG, is behind several airlines, including British Airways, Aer Lingus, and Iberia. To say the pandemic hurt this business is an understatement. With borders closed and travel restrictions enforced to slow the spread of Covid-19, IAG saw its revenue effectively evaporate within a few short weeks.
Since then, the situation has improved. Travel restrictions are slowly being lifted, and while transatlantic flight popularity is recovering at a slower pace than short-haul trips, IAG looks like it’s on the road to recovery.
Looking at last week’s report, passenger capacity for the past three months came in at 43.4% of pre-pandemic levels. At first glance, this isn’t too impressive. However, considering that’s up from 21.9% since the previous quarter shows that more passengers are returning to the skies. And management now expects this figure to reach 60% by the end of the year.
The operating profits are still in the red. But with revenue on the rise and cost-cutting efforts beginning to bear fruit, the loss for this latest quarter came in at €452m versus €1.9bn a year ago. And with €7.6bn of cash on its balance sheet, the company has a strong liquidity position, in my opinion. So I’m not surprised to see the IAG share price take off on this news.
Taking a step back
As encouraging as the firm’s progress is, it’s not out of the woods yet. Passenger volumes will likely recover over time. But even if they return to pre-pandemic levels, IAG’s share price may struggle to return to its former glory, due to its debt.
With virtually no revenue flowing into the business in the second half of 2020, management was forced to rely on creditors to keep the lights on. This undoubtedly has enabled the company to survive. However, it’s also led to a considerable build-up of debt. And that hasn’t changed with this report. Even though the cash balance increased in the last quarter, net debt still rose by 27%.
Why does this matter? Where there’s debt, there’s interest. And even before the pandemic, when taking lease obligations into account, the profit margins of this business were already pretty tight. Now with significantly larger financial commitments, IAG margins are likely to get even tighter.
The bottom line
IAG’s steady recovery is encouraging, and its share price reflects that. But I personally remain un-tempted by this business. I think there are far better opportunities to be found elsewhere.
