Stock of the Week: IAG

Post-It Note

We gave our Twitter followers a choice of listed travel firms for the stock of the week and the British Airways owner International Airlines Group (IAG) came out on top. A second lockdown is the worst-case scenario for travel industry, which had barely had 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 and traded as low as 66p in July, a staggering fall 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

For airlines like IAG, which lost over £5 billion in the first nine months of this year, they know that 2020 will be horrendous but the big unknown is when travel demand picks up again and whether the capital buffers they have will last them through to the other side of the crisis. While all hinges on a workable vaccine, the company doesn’t see a recovery until 2023. While forecasts are harder than ever at the moment, IAG 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 that the impact of Covid-19 has been “exacerbated by constantly changing government restrictions”. A vaccine could be commercially available soon but there is still not a global standard on airport testing and that could still put wannabe 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, and 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, over 300 UK passive and active funds hold IAG, with FTSE 100 trackers heavily represented, such as the Silver-rated iShares UK Equity Index and Bronze-rated L&G UK Index. Among Gold-rated funds, IAG is held by Fundsmith Equity.