Despite positive developments in the fight against Covid-19, today’s results from British Airways owner IAG (LSE: IAG) continue to highlight just how tricky the current trading environment is for the FTSE 100 constituent. Should I take today’s fall in the share price as a warning to steer clear, or an opportunity to finally climb on board?
Massive loss
Let’s get those grim numbers out of the way. Due to ongoing restrictions, passenger capacity over the first six months of 2021 was just under 22% of that seen over the same period in 2019. Accordingly, revenue from travellers tumbled 72.3% to just €1.14bn. This left total revenue at €2.21bn (down 58.2%).
Naturally, IAG’s bottom line suffered in tandem. A massive post-tax loss of €2.05bn was logged.
Where next for the IAG share price?
As with most stocks, I believe there are both bull and bear points to the IAG investment case. One reason to be optimistic is that the aforementioned pre-tax loss was actually far less than reported over the same period in 2020 (€3.81bn). So, things really are improving, albeit very slowly.
Second, news that fully-vaccinated flyers from the US and EU ‘amber countries’ will not be required to quarantine when arriving in the UK is clearly a shot in the arm for the company and its peers. I certainly don’t think anyone can reasonably deny that there’s an awful lot of pent-up demand from people to travel abroad. It really is just a question of time.
From a financial perspective, the FTSE 100 airline also looks to have taken all the steps it can. Today, IAG said it had €10.2bn in liquidity at the end of June thanks, in part, to recent oversubscribed bond issues, cost-cutting and a deferral of pension contributions.
Reasons to be cautious
On the flip side, the ongoing uncertainty with regard to just how the next few months will play out means that IAG still isn’t able to provide the market with guidance on full-year profits. The only prediction the company was willing to make is that capacity in Q3 is expected to be around 45% of 2019 levels.
That’s clearly better than that seen over H1. However, it also underlines just how far off a full recovery really is. Nor can it be guaranteed, which means the IAG share price will likely remain volatile for a while.
IAG’s creaking balance sheet is another worry for me. Net debt hit £12.1bn at the end of June — up 24% on this time last year. Sure, all airlines are suffering. Even so, the financial position looks worse compared to other London-listed airlines such as Wizz Air. I certainly wouldn’t be expecting dividends for a while if I held the shares. Moreover, the post-Covid-19 trading environment will surely be just as competitive as it was before the pandemic struck.
Still risky
Anyone buying the stock this time last year would be registering a gain of around 47% before markets opened. This is a great result and highlights how having a contrarian mindset can really pay off. Nonetheless, I wonder if the IAG share price is now firmly up to date with events.
As opportunities go, IAG still doesn’t make the cut for me and I won’t be buying now. In my view, there are other FTSE 100 companies offering arguably as much upside for much lower risk.
