The International Consolidated Airlines (LSE: IAG) share price has had a disappointing 2022, so far, down 30% over the past 12 months. But it perked up in July, gaining 10% during the month. What’s behind it, and could this be the start of a long-awaited recovery?
In a first-half update released on 29 July, the British Airways owner proudly proclaimed: “IAG returns to profit in the second quarter following strong recovery in demand across all airlines“.
That is a significant event, and it’s what a lot of investors have been waiting for. It’s all very well seeing a recovery just around the corner and taking a risk on it. But it’s a different thing altogether to see actual evidence through reported profits.
The first half as a whole did still bring a loss after tax and exceptional items of €654m. Still, that was way better than the €2bn loss in the same period in 2021.
Profit and cash
But for Q2, International Consolidated netted a profit of €133m. That’s good to see, but my concerns centred on two bigger issues. I’m talking of liquidity and debt.
The very survival of a number of aviation-related companies was at stake during the pandemic crisis and the near-halting of the industry. But, thankfully, IAG is looking like it’s in a better state on both those measures.
By 30 June, total liquidity had risen to €13.5bn, from a shade under €12bn at 31 December. That’s relatively modest but, in the circumstances, I see it as a breath of fresh air. The cash situation is also encouraging.
Cash rolling in
The company reported €9.2bn in cash, up €1.2bn from December. That was driven mainly by bookings for second-half travel. So it’s actual earned cash, coming from actual operations, and not some stopgap measure coming from borrowings.
Debt was down too, by €688m since December, helped by that cash. But it still stood at €11bn.
So would I buy now? The short answer is no.
Short-term gains
I do think the IAG share price could continue on upwards as the year progresses. Demand for air travel does seem to be booming. And if the UK’s tough inflation doesn’t put too much of a crimp in it, I think the second half could be strong.
But the past few years reinforces my long-term feelings about the airline industry. It’s held hostage to external events that it has no ability to control. In the past, that’s been soaring oil prices. More recently, the Covid pandemic brought it to its knees.
It’s fiercely competitive too, possibly the best example of a business where most customers buy solely on price.
Crisis? What crisis?
What if another crisis should come along? It might be sustained high fuel costs, or related to the war in Ukraine. Or it might be yet another Covid variant. International Consolidated Airlines would have to face it in a still much weaker financial position than back in 2019.
So yes, I strongly suspect that investors who buy now could enjoy gains over the next couple of years. But I see other cheap shares out there, in companies with competitive advantages and no heavy debt burden.
