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IAG expects more flying in Q3 - but uncertainties abound

Airborne uncertainties still linger
IAG expects more flying in Q3 - but uncertainties abound
  • The FTSE 100 airline company posted further losses in Q2
  • But it pointed to signs of pent-up demand including greater flying in the domestic Spanish market

It's obvious, but amid ongoing travel restrictions and uncertainty about the path of the pandemic, airlines and hotels have been some of the industries worst hit by Covid-19. That certainly applies to British Airways owner IAG (IAG) and uncertainties abound at the half-year mark. Passenger revenues dropped by almost three-quarters for the six months ending 30 June, landing at €1.1bn (£940m) – reflecting the fact that capacity in the second quarter was just over a fifth of that seen in 2019.

In turn, adjusted operating losses (excluding exceptional credits in 2021 and exceptional charges in 2020) stood at €2.2bn for the first half, wider than the comparative period’s figure of €1.9bn.

The FTSE 100 carrier group struck an optimistic note in its interim statement, but you wonder the point at which hope gives way to wishful thinking. Current passenger capacity plans for the July to September quarter are for around 45 per cent of 2019’s capacity. IAG anticipates that it will be operationally ready to fly up to roughly 75 per cent in the fourth quarter, which it believes would allow it to take advantage of a later summer tourism season.

The group pointed to “widespread evidence of pent-up demand” from short haul leisure to Spain domestic business travel. Group airlines Iberia and Vueling were the best performers within the group in the second quarter, chief executive Luis Gallego noted, with strong Latin American and Spanish markets.

Gallego added that “in the short term our focus is on ensuring our operational readiness”. His group “welcome[d] the recent announcement that fully vaccinated travellers from amber countries in the EU and the US will no longer have to quarantine upon arrival in the UK”.

Cash is king in many worlds, not least air carriers. It follows that IAG has worked to cut costs and bolster its coffers during the coronavirus crisis. At the half-year mark, group liquidity stood at €10.2bn – up from €8bn at the end of December. IAG attributed that improvement partly to accessing the UK Export Credit Facility, as well as the issuance of fixed rate bonds and securing a three-year revolving credit facility.

Cash operating costs for the second quarter stood at €190m per week. That figure is expected to rise to €270m in the third quarter as capacity increases.

INTERNATIONAL CONSOLIDATED AIRLINES (IAG) 
ORD PRICE:175.72pMARKET VALUE:£ 8.7bn
TOUCH:175.52-175.76p12-MONTH HIGH:222pLOW: 87p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:19ȼ*NET DEBT**:€12.2bn
Half-year to 30 JunTurnover (€bn)Pre-tax profit (€bn)Earnings per share (ȼ)Dividend per share (ȼ)
20205.29-4.22-125nil
20212.21-2.34-41.2nil
% change-58---
Ex-div:-   
Payment:-   
*Includes intangible assets of €3.2bn or 64ȼ a share. £1 = €1.17

FactSet consensus estimates put sales at €11.8bn for 2021, up from €9.6bn last year. But as ever, the course of the pandemic is impossible to predict – even with signs of greater demand in certain geographies. IAG may be better resourced than other, smaller carriers but risks remain. Sell.

Last IC view: Sell, 168p, 31 Jul 2020