Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

LONG-SUFFERING shareholders in British Airways and Iberia owner IAG understand only too well what it’s like being invested in a recovery play when there’s not much of a recovery.

The IAG share price embarked on a six-month-long downward track in March, since when much of the company’s fleet has remained grounded and cash has continued to be burnt.

The appearance of green shoots on the abandonment of the government’s traffic light system for overseas destinations fuelled a rise in the IAG share price in September, but can today’s third quarter results help keep that rebound on track?

IAG is all about forecasts at the moment, since the company continued to make a loss excluding exceptional items last quarter, this time amounting to a worse-than-expected €485 (£416) million. Encouragingly, cash flow turned positive for the first time since the pandemic.

No mention of a profit coming in the fourth quarter is a disappointment. Forecast capacity at 60% of 2019 levels certainly won’t be enough to conjure up that. Instead the company is only saying it is focused on increasing capacity to ensure it is set up for a return to profitability sometime in 2022.

IAG seems to be managing cost pressures well, as it has done in the past. Employee costs were 17% down in the third quarter compared with the same period in 2020. Fuel costs were down too (21% lower) despite rising passenger revenues1.

The pent-up demand to fly, especially long distance, no doubt remains strong. Moreover the substantial cash reserves built up by households during the pandemic, the return of employment to pre-pandemic levels and rising wages suggest many would-be flyers now have the means to do so.

Against that, the persistency of Covid-19 continues to deter many people from realising their travel ambitions. Rapidly rising household bills will be seen as another reason not to splash out.

In this environment, the reopening of the transatlantic corridor on Monday may be met with a more muted response from non-business users than the company thinks, especially at around £1,705 for an economy seat to New York (according to my quick search yesterday)2.

The market value of IAG is down by about two thirds since the pandemic began and, today, the IAG share price looks undervalued compared to recent history trading on a lowly multiple of just 5.6 times expected earnings3.

That’s despite going into these results with high hopes after the German carrier Lufthansa unveiled a surprise return to profitability in the third quarter on Tuesday4.

With IATA forecasting that air passenger journeys will grow at an average annual rate of 3.7% over the next 20 years, investors able to take a long view may well see this as an attractive entry point5.

However, in a weakening consumer environment, the short haul outlook for long haul may remain difficult. The significantly higher ratings applied to the budget, short-haul carriers Ryanair, easyJet, Jet2 et al suggest Heathrow, if not Houston, still has a problem brewing.

Source:

1 IAG, 05.11.21
2 British Airways, 04.11.21
3 London Stock Exchange, 05.11.21
4 Lufthansa Group, 03.11.21
5 IATA, May 2020

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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