IAG's second quarter revenue fell 89.0% to EUR741m as the airline was largely restricted to cargo flights, essential travel and repatriation. As a result the group made an operating loss of EUR1.4bn excluding exceptional items.
IAG will raise EUR2.75bn by issuing new shares, subject to shareholder approval at a General Meeting in September. The capital raise is fully underwritten and supported by Qatar Airways, which holds 25.1% of IAG' shares.
The shares fell 9.0% following the announcement.
Coronavirus has hit airlines hard.
Demand for flights has hit pretty much zero as travel restrictions ripple across the globe. Worryingly, IAG thinks it will take until at least 2023 for demand to recover to 2019 levels.
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 cash available to meet obligations.
IAG had access to EUR8.1bn in liquidity at the end of June and is looking to raise a further EUR2.75bn by issuing new shares. Net debt has been climbing, and management is acting pre-emptively to shore up the balance sheet. We think the new capital raise is necessary even if it will dilute current shareholders. IAG's debt burden would have curtailed management's options as it tries to negotiate the recovery.
The risk-reward profile of all airlines has been heightened dramatically by COVID-19. It's possible that some airlines will not make it through this degree of disruption, especially if we get a second wave of infections and travel restrictions remain in place for some time. However, those that do make it could see their competitive position strengthened in the end.
Significant liquidity puts IAG in a stronger position relative to some of its peers, and this is its main attraction in our view. But investors shouldn't lose sight of the fact the short-term earnings hit has been very ugly, and could get worse before better. Given planned cuts to capacity it will be a smaller company which emerges from crisis.
IAG key facts
- Price/Book ratio: 0.6
- Ten year average Price/Book ratio: 1.9
- Prospective yield: 0.9%
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Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Second quarter results
Passenger revenue fell 96.7% to EUR198m and other revenue fell 64.3% to EUR174m. Cargo revenue increased 31.3% to EUR369m. Operating costs before exceptional items fell 63.5% to £2.1bn. Management also wrote down the value of the fleet by EUR731m.
Management is currently planning for a 74% fall in capacity in the third quarter and a 46% fall in the fourth quarter, but recognise the uncertainty of these forecasts. IAG thinks it will take until "at least 2023" for passenger demand to recover to 2019 levels. The group is scaling back its fleet to reflect this.
IAG had EUR6.0bn in cash at the end of the quarter, down from EUR6.7bn at the end of December 2019. Net debt has risen from EUR7.6bn to EUR10.5bn in the same period. Net debt was 4.2 times the last 12 month's cash profits, compared with 1.4 times at the end of December. This is due to both rising debts and falling profits.
The proceeds of the proposed EUR2.7bn capital raise will be used to decrease leverage and support IAG's liquidity position.
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