After a few months of optimism, worries of a European third Covid wave have once again put into doubt the recovery potential of airline stocks. Indeed, the IAG (LSE: IAG) share price has fallen around 14% over the past week due to such fears. But with the government aiming to restart non-essential travel on May 17, IAG shares may represent good value, especially following its recent dip. As such, is this a stock I’m willing to buy or do I think there’s too much risk?
A potential UK third wave?
Unlike the UK, the vaccination programme within the EU has been slow. The result of this has been rising cases within many of the member states. For example, in France, scientists believe that there could be up to 2,000 new cases of the South African variant, and this has prompted the country to implement a new partial lockdown. Boris Johnson has also admitted that the UK is likely to be affected by the rising cases within the EU.
Such news is incredibly bad for airlines such as IAG. Indeed, UK Defence Secretary Ben Wallace has already admitted that there’s no guarantee foreign leisure travel will be allowed from May 17. This will potentially hamper rebounding bookings and flights may have to be cancelled once again. As such, I think that this worrying news will continue to place a strain on the IAG share price.
Is there any hope?
Right now, IAG is highly dependent on implementation of the UK’s roadmap back to normality. In certain respects, it looks very promising. Cases in the UK are currently low and Matt Hancock recently stated that the UK is ahead of roadmap dates. As mentioned before though, there are risks of a third wave. Although the IAG share price may seem cheap, it’s important to consider this risk.
Aside from a potential return to normality this summer, the prospects for IAG are mainly negative. This is mainly due to the uncertainty that remains over its return to business. In its recent trading update, the company was unwilling to provide any profit guidance for 2021 due to such uncertainty. The full-year trading update also revealed an operating loss of around €7.5bn, and a 29% increase in net debt to nearly €10bn. Unless normality can return this summer, I’m worried about the long-term future of IAG.
Am I buying IAG shares?
The quick answer to this question is no! The IAG share price has been boosted over the past few months by vaccine optimism, but considering the circumstances, I now believe it’s overpriced. More Covid news may therefore continue to spook investors, and lead to more selling. Although the UK roadmap is positive, it doesn’t compel me to buy.
Of course, normality could return this summer, and given the uncertainty out there, that’s perhaps as likely as the gloomier scenario. In that case, the IAG share price looks very cheap. But this isn’t guaranteed. As such, I’m not willing to take this risk and will look elsewhere for bargains.
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Stuart Blair 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.