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Is the IAG share price a bargain?

Image source: British Airways

British Airways parent company IAG (LSE: IAG) saw its share price lose altitude rapidly last year, before recovering partially. Vaccines could open up demand for air traffic again, boosting the IAG share price. However, for now I won’t be buckling in for the ride. While the IAG share price may look like a bargain, the uncertainty in its business prospects for 2021 makes it unattractive to me.

More rough skies ahead

The aviation sector in general is taking its time to recover from the impact of the pandemic. The second wave of lockdowns has stunted the initial traffic recovery seen over the summer for many airlines. That is not specific to IAG, but it is set to continue making it hard for the sprawling airline group to recover any time soon.

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Ryanair announced that it would cut most and maybe all flights from the British Isles until travel restrictions are lifted. Wizz Air only flew 20% as many passengers last month as it did the year before.

The IAG share price reflects this difficult trading environment. It hasn’t updated on demand as recently, but passenger revenue in the third quarter fell by over 70%. IAG does have some cargo revenue to fall back on, but it isn’t enough to offset the losses in its passenger operations.

The IAG share price reflects uncertainty

British Airways has secured a five-year loan guarantee backed by the UK government, for a handy £2bn. That helps strengthen the balance sheet, so cash outflow is less of an immediate concern for investors. But one of the conditions restricts dividend payments the airline makes to IAG. Technically that doesn’t mean IAG can’t pay out dividends. But with no dividends from its golden goose British Airways, and the political need to show restraint, I think this means IAG won’t pay dividends for the next year or two at least.

Dividends aren’t the only way for investors to make money. Capital gains can also mean an investment grows. IAG has more than doubled from its lows on anticipation of recovery. But it still trades well below where it sat before the pandemic – adjusted for a rights issue – so value investors may see an opportunity.

However, I think there are too many unknowns clouding the airline’s prospects to feel confident about any share price movement. We don’t know when passenger numbers will get even close to normal again. We don’t know what impact the lockdowns will have had on travel patterns. While some people may be desperate to fly again, a lot of people have discovered leisure opportunities closer to home and may never step foot on an aeroplane again. Meanwhile, the full impact of Brexit on British Airways and fellow IAG company Aer Lingus remains to be seen.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Wizz Air Holdings. 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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