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Is the IAG share price rise sustainable?

Image source: British Airways

International Consolidated Airlines Group (LSE:IAG) has been receiving a lot of press coverage this year for a variety of understandable reasons. This is one heavily shorted stock that has seen a tumultuous 2020 and is set for a bumpy ride ahead. Nevertheless, the IAG share price is rising as I type. So what’s causing the spike in positive sentiment today?

There are a few reasons, none of which offer a compelling case for investing, I feel. Firstly, the FTSE 100 opened higher, boosted by a rise in the dollar and US financial markets. The US is feeling encouraged by the possibility of a Covid-19 vaccine being ready by November. It’s also expecting further stimulus measures to be implemented shortly. Meanwhile in France, €100bn worth of stimulus is being promised to help the country recover. Amazon’s pledge of 10,000 new permanent jobs in the UK this year is also heartening. Together these external factors are boosting trader sentiment, encouraging them to buy into riskier stocks such as IAG.

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Is the IAG share price in risky territory?

There is much uncertainty still at play, and for those reasons IAG remains a risky stock to buy. The IAG share price is up 23% in the past month, but still down 66% year-to-date. Covid-19 isn’t yet behind us, infection numbers in the UK are rising and this is happening in many other countries too. Really, the only way for things to return to relative normality is to get a vaccine distributed. Reports of a vaccine by the end of the year are encouraging. But I’ll be surprised if an effective one is created, approved and distributed that quickly.

Industrial action and extravagant bonuses

IAG’s CEO Willie Walsh is leaving soon but has recently been awarded a bonus of £883,000. Considering the state of the airline industry, many people think this is scandalous. The ISS, a voting agency that acts as a proxy advisory firm, has advised IAG shareholders to vote against this.

The company owns British Airways, which is facing strike action as its trade union is bringing industrial and legal proceedings against the airline. The reason for the proceedings are allegations that BA is trying to force its workers to take massive pay cuts and change to insecure zero hours-type contracts.

The reducing appeal of global travel

Meanwhile, coronavirus travel restrictions are less stringent than they were earlier in the year. But flights are operating on a reduced capacity basis, and destinations are being haphazardly brought in and out of quarantine restrictions. This is unsettling for travellers and likely to put people off flying unless essential. Additionally, the appeal of global business travel is weakening as company boards look at ways to reduce their carbon footprints. The successful transition to virtual working throughout the pandemic is making this much more achievable, further curtailing the need to fly.

Finally, the International Air Transport Association has said it doesn’t see travel returning to pre-pandemic levels for at least four years.  

Planes being grounded, industrial action, large bonuses and an overall reduction in demand for travel. The risk factor in buying airline shares really has risen substantially. I think these factors combine to paint a dismal picture for IAG as a lucrative investment and feel the IAG share price has further to fall.

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Kirsteen 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.

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