International Consolidated Airlines Group SA (IAG) Ord EUR0.10 (CDI)
HL comment (30 July 2021)
In the six months to 30 June, IAG flew 20.8% of 2019 capacity, as Covid restrictions continued to weigh. Revenue declined 58.2% to €2.2bn, with a strong performance in Cargo offset by a 72% decline in passenger revenue. Despite the overall declines, trends did improve in the second quarter with revenue up 77% from the same time in 2020.
IAG reported an operating loss of €2.0bn, an improvement from the €4.1bn loss reported last year. This was primarily due to cost saving efforts, which saw spend on operations decrease by 54.4%.
The group expects capacity to increase to 45% of 2019 levels in the current trading period, but passenger demand isn't expected to recover to pre-pandemic levels until at least 2023.
The shares fell 2.9% following the announcement
IAG is in a tough spot. With long-haul travel still severely depressed, the group saw capacity rise only slightly in the second quarter. While things are forecast to improve, the group's expecting to operate below 50% of pre-pandemic in the near-term and passenger demand won't return to normal until 2023 at the earliest.
You can't knock management's efforts to cope in this difficult environment, though. Having pieced together a multitude of loans, deferred pension payments and shifted costs of the Air Europa merger further into the future, the group isn't in danger of a cash-crunch anytime soon with access to €10.2bn. We should flag that the group's efforts have kept it from going under throughout the crisis, but the balance sheet trauma will be a weight round its ankles for the foreseeable future.
To make up for a 72% decline in revenue from passenger flights, IAG ramped up cargo-only flights. A prudent move, but one that hasn't plugged gap. Ample liquidity does at least mean it should be able to capitalise on a return to the skies as things loosen up. IAG will hope the number of airlines vying for passengers is smaller, supporting ticket prices.
Based on management's projections, the group's summer season won't be the tailwind they were hoping for. Ever shifting travel restrictions have knocked passenger confidence, and although some of the group's markets like Spain have started to pick up as things loosen, operating at just 45% during the most lucrative time of the year is a crushing blow.
Another summer sitting on the tarmac will add to the group's already considerable scarring. IAG will continue to pare down operations to cope, but there's not much fat left to trim.
We should note that IAG's price-to-book value shot upwards over the past year. The group's taken on a lot of loans in that time, and sold off over €1bn worth of assets, which has depressed its book value (what's left after all of its debts have been paid).
While the vaccine roll-out has offered a light at the end of the tunnel, investors shouldn't lose sight of how much damage has been inflicted. Capacity cuts and the severe cost reduction programme mean IAG will be a significantly smaller company when it emerges from this crisis, not to mention a balance sheet that's been through the ringer. The absence of a proper summer season will set the group's recovery back considerably.
IAG key facts
- Price/Book ratio: 8.08
- 10-year Average Price/Book ratio: 1.65
- Prospective dividend yield (next 12 months): 0%
All ratios are sourced from Refinitiv. 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.
Half Year Update
The group added additional cargo flights to the schedule, which boosted Cargo revenue by 30.6% ignoring the impact of currency changes to €769m. Available seat kilometres (ASK) fell over 52%, and passenger revenue per ASK fell 42.4%. That fed into an overall decline in passenger revenue to €1.1bn from €4.1bn.
Geographically, Spain was the group's strongest segment with revenue falling 35.8% to €657m. Revenue from the UK was down 72.4%, sales in the US were down 76.7% and Rest of World lost 49.3%.
Iberia and Vueling were the group's best performers in the second quarter, reflecting stronger Latin American and Spanish domestic markets with fewer travel restrictions.
Non-fuel costs per Available Seat Kilometres rose 33.1%.
As at 30 June, the group had access to €10.2bn thanks to cost savings initiatives, bond sales, government loans and the deferral of UK pension contributions. Net debt rose to €12.1bn (2020: €9.8bn) or 4.4 times cash profits.
IAG had a free cash outflow of €1.2bn, and improvement on last year's €2.3bn outflow, reflecting management's focus on cash management.
On June 29 the European Commission announced an investigation into the proposed acquisition of Air Europa.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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