Back in September, I described International Consolidated Airlines Group (LSE: IAG) as a stock I’d avoid. I said I thought the group faced a long road to recovery and that IAG shares could fall below their ex-rights issue price of 131p.
Fast forward to today and shares in the owner of British Airways are changing hands for around 105p each. The airline group has also just cut its planned flying capacity again for the remainder of this year.
However, IAG’s financial position now looks much more secure, thanks to its €2.7bn rights issue. Is this the right time for bargain hunting investors to start buying, or is the situation still too uncertain?
Here’s the good news
To be fair to management, this crisis is not something it could have avoided. In most foreseeable situations, I think the company’s financial situation at the start of this year would have been safe enough.
The good news is that IAG’s rights issue has given the company the breathing space it needs to have a chance of recovery. Total available cash now stands at a massive €9.3bn. This might seem like overkill, but I don’t think it is.
IAG’s accounts for the six months to June show cash outflows of €216m per month. But that includes around 2.5 months of normal operation, when cash was flowing into the business. I’d estimate that monthly cash outflows today could be as much as €500m.
Overall, I think the group should have enough cash to be safe for 12-18 months. Will that be enough to put a floor under IAG’s share price while flying activity recovers?
Uncertain outlook for flyers
The short-term news isn’t good. A second wave of Covid-19 across Europe has resulted in an increase in travel restrictions and quarantine requirements.
When I commented on IAG in September, the airline expected to fly 40% of normal capacity in the final quarter of 2020. That figure has now been cut to 30%.
IAG had previously said it plans to fly 73% of 2019 capacity in 2021. There’s no word yet on updated plans for 2021. However, I suspect that plans for the first quarter of the year will be extremely cautious.
IAG shares: too much of a gamble?
As far as I can see, everything depends on whether people can fly freely again by next summer. For this to be possible, I’d say two things need to happen.
The first is that we’ll need pre-flight Covid-19 testing to be available at airports. The second things we’ll need is for the infection rate to have fallen and for governments to start lifting quarantine and travel restrictions.
Will this happen in time for airlines to enjoy a strong summer season next year? I have no idea.
One other worry is that IAG’s dependence on long-haul routes means it might struggle, even if European short-haul leisure travel picks up next year.
Right now, airlines don’t have much control over their destiny. For me, that makes IAG shares too speculative to be an attractive investment. I’m going to continue avoiding this stock.
