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IAG’s strengths have become weaknesses says broker


British Airways owner International Consolidated Airlines Group (LON:IAG) has long-term upside potential but there are no short-term positive catalysts on the horizon, broker Liberum Capital said.

Liberum analysts resumed coverage on the Anglo-Iberian airlines group’s shares with a ‘hold’ rating and a 100p price target a day after a third-quarter trading update landed eight days early.

An operating loss of €1.3bn before exceptional items was even worse than the bottom end of the City forecast range and compares with a €1.4bn profit this time last year.

Although more detailed quarterly figures are still scheduled for release on October 30, revenue was revealed to have fallen 83% in the quarter, with passenger capacity 78.6% lower and passenger traffic down 88%, resulting in a load factor of just 48.9%.

Management also lowered their outlook as coronavirus (COVID-19) measures hit the travel sector.

“We would not be surprised to see IAG’s capacity fall well short of the 30% of 2019 level,” Liberum analyst Gerald Khoo said in the note, observing that rivals easyJet and Lufthansa have indicated plans to fly up to 25% of 2019 capacity.

However, he said as cargo revenue has become “much more important than normal”, this may require the airline to provide flight capacity that is not supported by passenger demand.

Liberum’s newly restored forecasts are for a €4.8bn loss this year, below the bottom end of the previous consensus, with a sharp reduction in losses for next year.

However, such a bottom-line improvement in 2021 is “highly dependent on cost cuts”, along with a recovery in demand supported by government policies, with IAG seen turning marginally cash flow positive in 2022.

“In the long term, IAG’s strategic strengths should eventually reassert themselves,” the analyst said. “IAG’s strong hub airport positions at Heathrow, Madrid and Dublin will again become valuable when air travel demand recovers.”

In the short-term, however, IAG faces the industry-wide challenges but also its normal strengths becoming liabilities, as it has some of the strongest exposure to long-haul and business travel and geographic exposure to the UK, Spain, Ireland and the US, countries with either worse than average COVID-19 infection rates or tighter restrictions on international travel, which “means it is more heavily weighted towards the segments of air travel demand that are likely to take the longest to recover”, he said.

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