Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

IAG - recovery in demand expected to take several years

Sophie Lund-Yates, Equity Analyst | 29 April 2020 | A A A
IAG - recovery in demand expected to take several years

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

International Consolidated Airlines CDI

Sell: 326.60 | Buy: 327.00 | Change 39.30 (13.64%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

IAG's first quarter revenue fell 13% to EUR4.6bn and the group made an underlying operating loss of EUR535m, compared to a EUR135m profit in the same period last year.

IAG expects it to take "several years" for passenger demand to recover to 2019 levels, and is therefore restructuring the group. This will impact most British Airways employees, and could result in up to 12,000 redundancies. IAG has formally notified its trade unions.

The group will release more detailed first quarter results on 7 May as planned.

The shares were down 4% following the announcement.

View the latest IAG share price and how to deal

Our view

Airlines are a traditionally cyclical industry, and investors will be used to ups and downs. But current conditions are particularly challenging.

Coronavirus has hit airlines hard. Demand for flights has dropped substantially, although this is a bit of a moot point in the face of widespread travel restrictions. Worryingly, IAG thinks it will take "several years" for demand to recover to 2019 levels. If they're right, then many airlines will have significant excess capacity, and there's unlikely to be a buoyant market for unused planes. This is what's behind IAG's move to restructure, including laying off up to 12,000 employees.

In times like these investors will be thinking hard about the financial strength of the businesses they own. The two key metrics are therefore the amount of money going out the door, and the amount of liquid cash the group has to meet its obligations.

In 2019 IAG's total operating costs were EUR22.2bn before exceptional items, and we estimate cash costs were something in the region of EUR60m a day. Management will try to reduce these costs as much as possible, but we don't know how low they can get them yet. At the end of March, IAG had EUR 9.35bn in liquidity, of which EUR 6.95bn is cash and cash equivalents. This figure is probably already well out of date though, and we hope we'll get a more recent update on 7 May when the group next reports. The desire to preserve as much cash as possible is behind the group's decision to suspend the dividend.

In our opinion, IAG's significant liquidity puts it in a stronger position than some of its peers. The short term earnings hit has been very ugly though, and management expects it could get worse. If the disruption continues long enough even IAG's resources could reach their limit.

We don't know where this will end up, but the risk-reward profile of the airlines has been heightened dramatically by COVID-19. It is possible that some airlines will not make it through this degree of disruption, especially if it continues for an extended period of time. However, those that do make it could see their competitive position strengthened in the end.

Prior to the most recent update, IAG shares changed hands for 0.8 times book value, a more conservative way of valuing cyclical and asset-heavy businesses like airlines. However, it is possible that book value will be written down in the near future, so investors should be careful when using backward looking metrics in such a dynamic environment.

Register for updates on IAG

First quarter trading details

IAG's pre-tax profit was impacted by a EUR1.3bn exceptional charge for now ineffective fuel hedges. The group's operating result was in line with last year during the first two months of 2020, and most of the losses were incurred in March. British Airways was the biggest contributor to the losses, followed by Iberia and Aer Lingus. Vueling experienced only a minor increase in losses.

Capacity, as measured by available seat kilometres, fell 10.5% and the planes were on average 76.4% full, a decline of 4.3 percentage points. Passenger traffic in terms of revenue passenger kilometres declined by 15.2%.

IAG has reduced capacity by 94% for April and May, and is only operating passenger flights for essential travel and repatriation.

At the end of March IAG had EUR9.5bn in available liquidity, of which EUR6.95bn was cash or cash equivalents.

IAG is not giving detailed profit guidance, but expects losses in the second quarter to be "significantly worse" than those suffered in the first quarter.

Find out more about IAG shares including how to invest

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.