Are IAG shares on a knife edge over potential competition law breach?

• IAG shares down 52.50% since 3 January 2020
• CMA launched an investigation into the airline sector in December 2020
• Q2 2021 capacity set to be just 25% of 2019
• IAG’s net debt up 18.5% year-on-year
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Will IAG shares be impacted by potential customer refunds enforced by the CMA?

IAG owned British Airways and Ryanair are at risk of action from UK competition watchdog, the CMA. This is due to a lack of refund offers for flights cancelled as a result of Covid-19 restrictions. Both were said to have offered customers the option of free rebooking or a reusable voucher to put towards future flights instead of an immediate refund. The CMA believes this move likely breached competition law.

Andrea Coscelli, chief executive, CMA, said: ‘Customers booked these flights in good faith and were legally unable to take them due to circumstances entirely outside of their control.'

‘We believe these people should have been offered their money back’.

The CMA has written directly to both British Airways and Ryanair to resolve the issue, with retrospective refunds clearly on the table as a potential resolution – a move that could seriously affect IAG’s bottom line further still.

How will IAG cope with fresh UK travel restrictions?

The IAG share price has been largely flat since 7 June, when fresh travel restrictions on British citizens were imposed by the UK government.

The UK has been working on a traffic light-style system with ‘green’ countries deemed low-risk nations to visit. ‘Amber’ countries require travellers to quarantine for ten days when returning to the UK. Meanwhile, high-risk ‘red’ countries are considered off-limits.

Portugal had been one of the select nations on the UK’s green list until 3rd June when its rating shifted from green to amber. This sparked panic for citizens already in Portugal and those with upcoming holidays booked. In addition, the US and Spain are on the amber list, which are two of IAG’s biggest markets.

With the UK’s ‘independence day’ of 21 June now seemingly in question, any further delays to Britain returning to a new normal way of life may have a negative impact on the aviation industry and IAG shares in particular.

Will concerns over IAG’s balance sheet and rising fuel prices remain?

Additional areas of concern are surrounding IAG that could make investors hesitant about going along with the IAG share price, aside from the ever-changing travel rules. First, its most recent Q1 2021 update revealed that flight capacity will be down to just a quarter of its like-for-like capacity in 2019. Furthermore, the price of Brent crude oil is bullish once more at over $70, which is far from ideal for airlines when operating at low capacity.

The IAG balance sheet also revealed net debt had soared 18.5% year-on-year to €11.5bn, with a recent €825m convertible bond to boost liquidity further proof to would-be investors that its cash flow remains fragile.

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