Yesterday was a sea of red across financial markets. The FTSE 100 dumped over 150 points in a single day, closing almost 2.5% lower from where it opened. This comes after a sell-off late last week as well. Oil dropped around 6.5%, the British pound moved lower and even gold couldn’t catch a bid. Within this turmoil was one of the worst performing FTSE 100 stocks. The International Consolidated Airlines (LSE:IAG) share price fell 5.2%. What was going on here?
Not a free ‘Freedom Day’
There are two similar reasons for the slump in the IAG share price, both connected to Covid-19. The first reason links with two of the largest airlines within the IAG group. These are British Airways and Aer Lingus. Both base most of their fleets within the UK. As such, freedom of travel for customers in this area is key.
Even though yesterday was called Freedom Day, it could actually be anything but that for many who will have to self-isolate. It’s reported that Covid cases could hit 100,000 per day later this summer without any restrictions. The issue this causes is that many people will be in contact with someone with Covid-19 and will have to self-isolate.
The knock-on impact here is that IAG might see lower than expected demand to travel as people have to self-isolate and cancel trips. Lower flying miles, along with regular fixed costs, is no recipe for strong profits. I think this is one reason why the IAG share price fell heavily yesterday.
Another reason that ties in with this is that despite good vaccination rates in the UK, many countries globally are still really struggling. This is more of an issue for British Airways, with the long-haul segment of the market. It’s irrelevant what the situation in the UK is like if the destinations of the IAG planes are in lockdown.
Even short-haul flights have suffered a blow recently, with the UK Government doing a U-turn on letting fully vaccinated French arrivals avoid quarantine in the UK.
Until the situation globally shows signs of improvement, I think the IAG share price will remain under pressure.
Financial forecasts weighing on the IAG share price
Half-year results are expected next week from IAG. I think some of the reason for the slump in the share price is investors selling before the results hit. This is because the outlook over the past month or so has materially worsened ahead of the results.
The operating loss for Q1 was €1.1bn, and although I would expect the Q2 loss to be smaller, I imagine it will still be loss-making. This would add another quarter of losses for the company. If the update for H2 is more conservative than investors are hoping for, I think the shares could easily tumble further in the immediate aftermath.
The IAG share price could rally from its current level, with the crash just a blip, of course. If travel corridors open quickly and UK cases and self-isolation get under control, the damage may be tolerable. H1 results could even surprise the market in a positive way.
Ultimately, it’s up to every investor to weigh up the risks when a share is falling heavily. For me, I’m steering clear for the moment.
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jonathansmith1 has no position in any share 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.