UK markets closed

With BA in ‘battle for survival’, why I think IAG shares are likely to plummet further

Andy Ross
An airplane on a runway

It has been reported in the media within the last week that British Airways’ chief executive, Alex Cruz, has said the airline is in a battle to survive. In a message to staff he said that there would be job losses and planes would be grounded.

The outbreak of coronavirus is being talked of as a greater threat to the airline than 9/11, or the financial crash over a decade ago.

The International Air Transport Association has estimated globally that the virus will hit airlines to the tune of £113bn, this year alone.

This is why there have been calls from the airline industry for government help, but whether that will be forthcoming is yet to be seen. Whether EU rules on state aid prevent it, is also yet to be tested.

What does it mean for parent company IAG?

The latest from FTSE 100 parent company IAG (LSE: IAG) is that long-serving chief executive Willie Walsh will postpone retirement to spearhead the response to coronavirus.

IAG said that it would reduce its capacity in terms of available seat kilometres by 7.5% in the first quarter of 2020, compared to a year ago. By April and May, that figure will be cut by at least 75%. 

Actions are being taken to reduce operating costs and boost cash flow, including grounding surplus jets, cutting non-essential non-cyber-related IT spending, freezing discretionary spending, temporarily suspending employment contracts, and reducing working hours.

As at 12 March, IAG said that the group had cash, cash equivalents and interest bearing deposits worth €7.35bn. This is good news. As is the fact it has been a hugely profitable group in previous years. Operating profits were £2.89bn in the 2019 full year.

Plummeting share price

The share price of IAG has fallen by 60% in just the last month. As countries around the world step up drastic actions to try and slow the spread of the virus, I only see things getting worse for airlines. The response so far is hitting the vitally important summer holiday bookings. 

On the plus side, executives from IAG have been buying shares, which is a sign of confidence. And, the oil price has also plummeted, which reduces a key cost for the company.  

I expect IAG will survive given the amount of cash it has. I think management has acted quickly and built a strong business. But if coronavirus persists, there seems little to reason to invest, even after the recent steep share price falls.

The best course of action seems to be to wait to see if there’s a second wave of coronavirus, as has been predicted. At that point, I would still wait to buy IAG shares when the stock market recovers. At that point, with weaker airlines likely having failed, IAG’s airlines could pick up market share and highly profitable airport slots. In the long term, the share price should do well. 

The post With BA in ‘battle for survival’, why I think IAG shares are likely to plummet further appeared first on The Motley Fool UK.

More reading

Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020