Since I last wrote about British Airways owner IAG (LSE: IAG), the share price has seen an 11% recovery. After a generally positive set of H1 results, I could be tempted into buying the shares in order to capitalise on the potential upside.
IAG shows promise
IAG followed through on its Q1 guidance of achieving profitability in the second quarter. Q2 was, in fact, the group’s first profitable quarter since the start of the pandemic, with an adjusted earnings per share (EPS) of 2.5c.
| Metrics | H1 2022 | H1 2021 | Change |
|---|---|---|---|
| Total revenue | €9.35bn | €1.14bn | 720% |
| Operating profit | -€438m | -€2.04bn | 79% |
| Adjusted EPS | -13.8c | -43.7c | 68% |
| Net debt | €10.98bn | €11.67bn | -6% |
| Net cash | €9.19bn | €7.94bn | 16% |
It was also pleasing to see revenue per available seat kilometres (ASK) and passenger numbers edge closer to pre-pandemic levels. Aside from that, IAG managed to improve its financial position slightly, reducing its debt by €688m, while receiving positive free cash flow.
| Metrics | H1 2022 | H1 2019 | Percentage of 2019 Levels |
|---|---|---|---|
| ASK | 118m | 163m | 72% |
| Passenger revenue per ASK | 6.46c | 6.52c | 99% |
| Passengers carried | 40m | 56m | 71% |
| Passenger load factor | 77.8 | 83.0 | 94% |
Therefore, the view of achieving operating profitability by the end of the year is starting to become a realistic possibility. All signs are pointing towards an increasingly promising rest of the year for the FTSE 100 firm.
Striking deals
Apart from the much improved financial performance of the company, IAG also managed to quash fears of future strikes. The company managed to strike a deal with 16,000 workers for a 13% pay rise this year. This should alleviate fears of last-minute flight cancellations, at least for the time being.
Nonetheless, not all is as smooth cruising as it may seem. This is because Heathrow Airport has opted to extend its cap on passenger numbers until the end of October, with no more than 100,000 travellers per day, leading to cancellations of tens of thousands of flights. As Heathrow is the hub of IAG’s most profitable airline, I’m expecting this to impact H2 results.
As a result, CEO Luis Gallego revised the company’s outlook downwards. IAG now expects capacity to hit 78% of 2019 levels, as compared to the previous 80% that IAG had expected. From this, North Atlantic capacity (IAG’s most profitable routes) is now expected to hit 92% of 2019 levels in Q3, compared to the previous guidance of 95%.
Having reservations
While the future outlook for IAG still remains rather promising, I have my reservations regarding its potential upside. Although passenger demand still remains strong, I’m fearful that it’s only a matter of time before sky-high inflation, and a potential recession on the cards, starts hitting consumers harder.
Furthermore, IAG’s long-haul recovery continues to lag that of shorter trips. The continued travel restrictions in large parts of Asia, specifically China, is hindering its growth potential. And with China sticking to its zero-Covid policy, this avenue doesn’t look likely to recover any time soon. Business travel also still continues to lag, only hitting 60% of its pre-pandemic volume. Moreover, as the winter months approach, I’m expecting the number of holiday travellers to start winding down.
Even though IAG shares have the potential to grow plenty, my optimism is hindered by a cloudy economic environment. Overall costs still remain high and, most importantly, the company still has a mountain of debt to pay off, which is expected to increase going into the year end. For that reason, I won’t be investing in IAG shares.