International Consolidated Airlines (LSE: IAG) has only just secured a new recapitalisation package. Investors fully subscribed to the new capital raise, and nerves seemed to calm a little. The IAG share price settled and even started moving up a little.
Governments were steadily lifting their Covid-19 restrictions and airlines were just starting to see a little hope on the horizon. But, in line with warnings from many of the world’s health experts, the second wave of the virus has struck. And people have pulled back from their post-lockdown holiday plans.
Then on Thursday, IAG revealed painful third-quarter figures. The company now plans for capacity in Q4 of no more than 30% of its 2019 operations. As a result, it says it “no longer expects to reach breakeven in terms of net cash flows from operating activities during 4Q 2020.“
Investors understandably responded negatively, and the IAG share price fell 5.7% in early trading. But some enthusiasm returned in the first couple of hours. And, as I write, the shares are down only around 1.5%.
Weaker than expected
Revenue in Q3 fell by 83% to €1.2bn, from €7.3bn in the same quarter last year. And while the company made an operating profit of €1.4bn in Q3 2019, this year it recorded an operating loss of €1.3bn. That’s not surprising when we look at passenger numbers. Passenger capacity (in available seat kilometres) dropped 78.6%, while passenger traffic (in revenue passenger kilometres) plunged by 88%.
Bookings have not progressed as previously expected. IAG puts that down to “additional measures implemented by many European governments in response to a second wave of Covid-19 infections.” Yet, the IAG share price remains resilient. Why is that?
Strong liquidity
On the upside, liquidity looks good. The capital increase provided €2.74bn in gross proceeds, but things seemed reasonably secure even before that. At 30 September, IAG’s total liquidity stood at €6.6bn, and now we’re looking at €9.3bn.
Full Q3 results are due on 30 October, and the IAG share price seems to be holding. So what would I do now?
Well, firstly, the only thing I find surprising about the pandemic’s second wave is that people are surprised. When I saw folks rushing back on board planes pretty much the moment they were allowed to, I thought they must be mad. We’re nowhere near herd immunity. And I think it’s finally dawning on the optimists that this pandemic could be with us for a lot longer than we’d feared.
IAG share price stability?
With that €9.3bn in liquidity, and at the current rate of loss, I think IAG could keep going for quite some time before profit returns. And I’m convinced this strong liquidity position lies behind the muted reaction to the Q3 underperformance reported Thursday.
So I think we might have some substantial support backing up the IAG share price here. As such, I think IAG could be an attractive target for recovery investors. But my bottom line feeling is, why take the risk? Why, when there are so many other great share buys out there now with significantly lower risk?