International Consolidated Airlines (LSE: IAG) gave us an update on the financial position at British Airways on Monday. And at the time of writing, the IAG share price is the FTSE 100‘s second biggest riser with a gain of 2.5% on the day. Part of my Stocks and Shares ISA strategy these days is to look for recovery candidates, so is this one?
Since a 2021 low on 26 January, IAG shares have gained 60%. Over the same time span, the FTSE 100 has lost 1%. Are we in for a sustainable IAG share price recovery, and what does the current British Airways situation tell us? Well, first, I’m not going to forget that the current strength lies against a far gloomier background.
Over the past 12 months, the IAG share price is still down a whopping 73%. And even before the Covid-19 pandemic struck, IAG shares had been moving pretty much sideways for around five years. The airline sector can be a volatile one too, subject to numerous possible short-term shocks. My usual rule of thumb is that I will only buy a share if I intend to hold it for at least five years. But for more potentially volatile stocks, like airlines, I’d extend that to at least 10 years.
I don’t want to look back on the devastation of the past year, other than to set the scene for my ponderings about IAG’s future. And that scene essentially describes a company that would have quickly collapsed had it not secured a huge pile of new financing. We await full-year results, due on 26 February. But at the third-quarter point at 30 September, International Consolidated Airlines reported net debt of a fraction over €11bn.
Surviving the crisis
I reckon there’ll be enough liquidity to see the company through the crisis. But I expect that debt to weigh heavily on the IAG share price for years to come.
Anyway, what about the latest update? British Airways has made progress on two financing deals, increasing total liquidity by £2.45bn, and IAG is exploring other debt initiatives. The first of the two, a £2bn UKEF guaranteed five-year loan facility announced in December, has reached final agreement. British Airways should be drawing on it before the end of February.
The other deal involves pension deficit contributions. The airline has reached an agreement with the trustee of its pension scheme to defer £450m in deficit payments due between October 2020 and September 2021.
Tempted by the IAG share price?
I find this news encouraging. It suggests to me that creditors see British Airways, and by extension IAG, as worthwhile risks. So if any further funding is needed, I think the odds are that it will readily be found. What does that say to me about the long-term prospects for the IAG share price?
Well, I’d rate the chances of a recovery over the next five years as reasonably high. And I can envisage a boost when flying is declared safe once more. But I still expect to see significant volatility over the next few years. And the long-term risks associated with airlines are still there. No, I wouldn’t invest in an airline even at the best of times. My ISA money will go elsewhere.
Alan Oscroft 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.