International Consolidated Airlines Group (LSE: IAG) has been one of the FTSE 100‘s worst performers in the 2020 stock market crash. A 30% dip on 14 September is, in itself, not a cause for panic – that’s down to the completion of a new €2.7bn fundraising and equity issue. But the IAG share price is now down more than 80% since the start of 2020.
Is it time to load up on cheap airline shares, or should we be stepping carefully over a dead dog?
Those who subscribed for the new stock issue certainly seem to see IAG as a buy. The new shares were issued at a 36% discount to the previous Friday’s equivalent ex-rights IAG share price, which sweetened the deal a bit. Qatar Airways Group, IAG’s largest shareholder with 25%, joined in with enthusiasm – but I can’t really see it as being able to turn the offer down.
Improved liquidity
To describe the purpose of the new fundraising, I think I need to quote the company specifically. It is to “enable IAG to strengthen its balance sheet and reduce leverage; enhance liquidity and help IAG withstand a more prolonged downturn in air travel based on IAG’s stressed, downside scenario planning; and provide IAG with the operational and strategic flexibility to take advantage of a recovery in demand for air travel”.
That all makes perfect sense, I’m sure. But there’s a clear subtext: We could be heading for deeper trouble, and we need some serious cash.
Saying that, the British Airways owner wasn’t in any immediate danger of going bust. I also don’t see any great risk that the IAG share price could head all the way to zero. And after the fundraising, we’re looking at an airline with total financial resources of more than €10bn – one of the best balance sheets in the business.
Bums back on seats?
Whether the IAG share price is a bargain now depends on the outlook. And people will get back to flying, sooner or later. The IAG board has said it expects demand to return to 70% of 2019 levels by 2021. But you’d expect an optimistic prognosis from the people running the company. And I’m not quite so buoyant on the question myself.
Let’s assume there’s an effective coronavirus vaccine by some time in 2021. And that the pandemic is effectively ended – at least until the next one. The problem we’ll then face is potentially a world of economic devastation. And though we are already seeing some consumer confidence returning through improved retail sales, I can see it taking a while yet before aviation demand reaches IAG’s hoped-for levels.
IAG share price: What do to?
So, back to the question of the IAG share price: dead dog or unmissable buy? Actually, I reckon neither. With the balance sheet supported by strong levels of liquidity, I do think there’s a good argument for buying. And I can see a reasonable chance of IAG shares regaining lost ground in the next couple of years.
But against that, I remain convinced that the airline sector is a toxic one for investors. And with so many other great buys out there, I just see no need to take the risk.