Stock of the Week: IAG

British Airways owner has been hammered by coronavirus restrictions, but a fully subscribed rights issue is a vote of confidence and brings much-needed capital

James Gard 5 November, 2020 | 11:08AM
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Post-It Note

We gave our Twitter followers a choice of listed travel firms for stock of the week and British Airways-owner International Airlines Group (IAG) came out on top.

A second lockdown is the worst-case scenario for the travel industry, which had barely had a chance to recover from the first one. Airlines didn’t get a full summer of flying in any case: popular short-haul destination Spain was put on the UK quarantine list in July during the peak of holiday season and many travellers have opted to stay at home this year for obvious reasons.

So where does that leave Europe’s largest listed airline group, which owns brands such as national flag carriers British Airways, Iberia and Aer Lingus, as well as low-cost airline Vueling?

Pre-coronavirus, IAG shares started the year at 250p. They fell as low as 66p in July, a staggering drop of 73% as investors ditched travel sector stocks. But shares have recovered since, as the company managed to raise £2.5 billion in a rights issue where demand for shares exceeded supply. Rights issues tend to depress share prices in the short-term as investors know there will be more and cheaper shares on the market. We've explained how rights issues works in this guide to companies raising money. If many investors take up these "rights" that's usually a strong vote of confidence in a company and they are happy to pick up these shares at a cheaper price now and hope for a long-term recovery.

2021 and Beyond

Airlines like IAG, which lost more than £5 billion in the first nine months of this year, know that 2020 will be horrendous. But the big unknown is when travel demand will pick up again and whether the capital buffers they have will see them through to the other side of the crisis. IAG doesn’t see a recovery until 2023 and while forecasts are harder than ever at the moment, it expects airline capacity in the fourth quarter to be 30% of 2019 levels, down from 40% in September.

Chief executive Luis Gallego, who took over in September from industry veteran Willie Walsh, says the impact of Covid-19 has been “exacerbated by constantly changing government restrictions”. A vaccine could be commercially available soon but the lack of a global standard on airport testing could put would-be travellers off from booking their flights for 2021.

We wrote about the travel industry as lockdown restrictions started to ease in July and profiled the managers taking a contrarian bet on a rebound in the sector. Now the shutters have started to come down again, airlines just have to survive this period, as William Ryder, equity analyst at Hargreaves Lansdown, points out: “While airlines can take some actions to promote confidence on the part of travellers and keep planes safe, such as testing, cleaning and social distancing, ultimately the airlines have had to batten down the hatches and wait this out.”

Ryder thinks IAG has enough cash to survive this period but there are risks of a “third wave” disrupting next summer’s trading. “If this is it, and some combination of a vaccine, track and trace and partial herd immunity can prevent a third wave next year, IAG should come through, albeit badly scarred," he says.

According to Morningstar Direct data, more than 300 UK passive and active funds hold IAG shares, including many FTSE 100 trackers such as the Silver-rated iShares UK Equity Index and Bronze-rated L&G UK Index. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

James Gard  is content editor for Morningstar.co.uk