Can the IAG share price fly back to its pre-pandemic point?

The IAG (LON: IAG) share price has suffered from the pandemic. It hit a high of 671p in January 2020, before collapsing 86% to 91p by 2 October 2020. This year, its highest rally was to 218p on 7 April. But by 5 November, the airline stock had fallen back to 180p. And after releasing another set of weak results, the stock has slid even further to its current price of 148p.

But with Transatlantic flights to and from the USA having restarted this week, there might be a silver lining in this airline stock’s dark clouds.

IAG share price: Q3 2021 results

In the nine months to 30 September, total revenue fell to €4.921 billion, a 24.4% decrease compared to 2020. Operating loss for Q3 was €452 million, while cash operating costs hit €260 million per week. Cumulatively, this saw net debt rise 26.6% to €12.356 billion. It's not hard to see why investors were unimpressed. And if interest rates start to rise soon, its debt could pose a real problem for the airline stock.

On the other hand, Q3 passenger capacity was 43.4% of 2019. This is up from 21.9% in Q2, and IAG plans for Q4 capacity of around 60% of 2019’s. If it maintains this trajectory, passenger numbers may return to pre-pandemic levels by mid-2022.

CEO Luis Gallego said that the ‘Group’s operating loss more than halved compared to previous quarters. In Q3, our operating cash flow was positive for the first time since the start of the pandemic and our liquidity is higher than ever, reaching €12.1 billion.’
And he highlighted the ‘full reopening of the transatlantic travel corridor (as) a pivotal moment for our industry. British Airways is serving more US destinations than any transatlantic carrier.’

The end of the ban means that fully vaccinated travellers from 33 countries, including the UK, will be able to enter the US for the first time since March last year. And since major competitor Norwegian Airlines has exited transatlantic flights, IAG could even snag a larger market share.

Will IAG take flight?

IAG expects its 2021 operating loss to be an eyewatering €3 billion. But Gallego insists that ‘there's a significant recovery underway and our teams are working hard to capture every opportunity. We continue to capitalise on surges in bookings when travel restrictions are lifted.’ Accordingly, with Transatlantic flights reopening, it expects to return to profitability by next summer.

But the pandemic is far from over. Austria has just announced it will be moving back into a full lockdown on Monday. And with cases rising Europe-wide as we head into winter, there’s no guarantees that travel restrictions won’t be back in force soon.

Moreover, rising inflation is threatening to restrict disposable income available for leisure travel in the coming months. And while Gallego noted ‘early signs of a recovery in business travel,’ the rise of remote working means that it might never return to the levels seen in 2019. In addition, many businesses worldwide are committing to reducing their carbon footprints. Lessening their air miles might be a simple, and easily demonstrable, way to do this.

And the British Airways brand suffered reputational damage over the course of the pandemic when it refused to reimburse passengers for flights they were legally restricted from taking. But with €12.1 billion in liquidity, IAG will be able to survive until profitability returns next year.

But the share price would have to climb 350% to reach its pre-pandemic high. And the FTSE 100 averaged a 14% gain this year, against IAG’s share price which fell 6%. Moreover, HSBC analyst Andrew Lobbenberg believes the company may soon create new shares to pay down its debt mountain. And this would see the share price fall further.

Most FTSE 100 stocks are lower risk with constant returns. And IAG’s reliance on a travel rebound makes it riskier than most. But at such a low historical price, the potential rewards might be worth it for adventurous investors.

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*Based on revenue excluding FX (published financial statements, June 2020).