We’ll surely dig over the bones of what happened to International Consolidated Airlines (LSE: IAG) in 2020 for a long time. But it’s only worthwhile if we use it to help make sense of what the future might hold for the IAG share price.
IAG shares are up around 75% over the past month. And by the end of November, IAG was one of the top traded shares over at Hargreaves Lansdown, along with Rolls-Royce.
Private investors in the UK appear bullish about the aviation business, then, on the back of Covid-19 vaccine successes. But, I do think optimism over 2021 prospects for the Rolls-Royce share price are a bit premature. So what about the IAG share price?
Firstly, something I’ve spoken of before, but which bears repeating. We will not all get our jabs by Christmas and jet off into the New Year sun. No, vaccinating the UK’s population is a mammoth task. And it will be months before the vaccine even starts to reach the great majority of younger and healthier people.
IAG share price pressure
I just don’t see airline bookings for summer hols in 2021 coming anywhere near pre-pandemic levels. In fact, I expect 2022 bookings to remain depressed too. I really don’t foresee a return to 2019 flying volumes any time soon. So, I can see the IAG share price continuing under pressure for a good bit longer.
And what about IAG’s business? Can it hold out until profits start to roll in again? On that score, I think things are looking reasonably comfortable. In September, IAG raised €2.7bn through the issue of new shares. That is a big chunk of new cash, and those who invested at a discount to the IAG share price at the time are already in profit.
But it does come at the expense of dilution. Future earnings per share and dividends per share figures will be proportionately lower for the same overall amounts of cash. So even if IAG does return to earlier profit levels, it will be split more ways.
What about debt?
But new equity is better than greater debt, isn’t it? Well, I’m not taking my eye off IAG’s debt level, which has climbed sharply. At 30 September, net debt had reached €11,096m, up from €7,571m at the same point a year previously.
That leads to a rather worrying figure pointed out by fellow Motley Fool writer Roland Head. Roland calculated IAG’s enterprise value, which is the total of all its shares at the current IAG share price, plus net debt. Roland worked it out at around £15.5bn. IAG’s enterprise value a year ago was about the same, even though future sales and profits now look set to drop significantly. So markets are still putting the same total valuation on future streams of earnings, while the outlook for those earnings has degraded significantly.
On one hand, I rate IAG as one of the airline companies most likely to survive and grow over the long term. But on the other, I see really tough earnings prospects for at least a few years. In 2021, I think the IAG share price could be volatile. And I reckon it has a good chance of losing ground.