Boris Johnson’s announcement that the government is looking to end all coronavirus restrictions over the summer has been greeted with cheers from the holiday industry. Visitor numbers to holiday websites surged after yesterday’s announcement. There was also a jump in demand for travel stocks, such as the IAG (LSE: IAG) share price.
The announcement suggests the travel industry could see a recovery in the second half of 2021. That implies airlines such as British Airways, which IAG owns, may be able to start the recovery process. With that in mind, I’ve been taking a closer look at the IAG share price with the intention of adding it to my portfolio as a recovery play.
IAG share price outlook
Yesterday’s announcement was a step in the right direction for the travel industry. Unfortunately, it isn’t going to be able to recover the past year’s losses overnight. Even if holiday bookings quickly return to levels seen in 2019, it could take years for companies to pay off the debt they’ve accumulated throughout the crisis.
In some cases, this liquidity has come with stringent restrictions. For example, BA recently announced that by deferring its pensions contributions and taking out yet another loan, it had boosted liquidity by £2.5bn. Under the terms of the pension agreement, the airline will pay no dividends to IAG before the end of 2023 in return for delaying deficit contributions. There are also dividend restrictions attached to the £2bn loan the company received.
Before the pandemic, BA was IAG’s cash cow. These restrictions imply the group will receive limited distributions from its subsidiary from now on. That could impact returns from the IAG share price.
However, this doesn’t take into account the most optimistic scenario. If the airline industry recovers faster than expected, BA may be able to refinance its loans. This could remove restrictions, allowing the group to resume dividend payments to its parent.
The company could also benefit from the fact that one of its main competitors on the critical London–New York route, Norwegian, has pulled out of the long-haul travel market. Another competitor, Virgin, has also had to severely curtail operations due to solvency issues.
Therefore, going forward, I think the business will face some significant challenges, but there will also be opportunities.
Buy, sell or hold?
Based on all of the above, I’m cautiously optimistic about the IAG share price outlook. The worst could be behind the business. It might take some time for the group to recover to 2019 levels of profitability. But the imminent threat to its survival now seems to have passed.
That said, there’s no guarantee IAG will be able to put the worst behind it in 2021. As such, I’m not going to buy the stock for my portfolio today. The company faces an uphill struggle to recovery. I believe there are better ways to invest in the global economic recovery than this airline, which is drowning in debt.
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Rupert Hargreaves 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.