The International Consolidated Airlines (LSE:IAG) share price has had a pretty rough time these past 18 months. With travel restrictions due to the pandemic keeping planes on the ground, the airline company’s primary revenue stream almost evaporated.
But now that the vaccine rollout is making good progress, planes are returning to the skies. As a result, the stock is up by almost 55% in the last 12 months, despite last week’s tumble. So, is it time to add this stock to my portfolio?
The rising IAG share price
There isn’t much mystery as to why the IAG share price has been climbing these past few months. Now that travel restrictions are beginning to ease, the volume of travellers across the entire airline industry is on the rise. Last week, IAG released its half-year earnings report. And the results were a mixed bag, in my opinion.
Its all-important passenger capacity continued to rise to 21.9% of pre-pandemic levels in its second quarter. However, this is actually below the management team’s first-quarter forecast of 25%. So seeing the IAG share price fall on this report isn’t too surprising. But capacity levels are heading in the right direction. And the firm has since issued a new capacity forecast of 45% for the remainder of 2021.
Liquidity has also improved thanks to newly issued and oversubscribed senior and convertible bond offerings. As of the end of June, the total cash balance increased by 29.5% to €7.6bn compared to a year ago. That certainly gives some more breathing room. But what I find more encouraging is its shrinking operating losses. In the last six months, these have nearly halved from €4.1bn to €2bn.
Overall, it seems the worst might be over for IAG, and I expect its share price will continue recovering over the long term. But there remain several challenges to overcome.
The risks that lie ahead
There has been a rising level of uncertainty regarding the impact of the Delta variant of Covid-19. This virus strain has led to rising infection rates. Suppose governments start reintroducing travel restrictions to combat this spread? In that case, IAG’s share price recovery may be on hold for a while.
Even assuming this doesn’t happen, its debt level is quite concerning to me. Its latest set of bond issues have substantially improved liquidity. But solvency has suffered for it. As it stands, the firm’s total debt now sits at €19.8bn (£16.9bn). Based on IAG’s current share price, that’s nearly double the market capitalisation of the business. Needless to say, this level of leverage adds some considerable risk, as well as a high interest bill.
The bottom line
After more than a year in confinement, the number of individuals venturing out on holiday has surged. In fact, both Heathrow and Gatwick airport recently reported their highest passenger numbers since the pandemic began. This is definitely an encouraging sign for the IAG share price.
But having said that, the degree of financial leverage for this business worries me. Therefore, I’m keeping IAG on my watchlist for now simply because I think there are far better investment opportunities to be found elsewhere.
