Where next for IAG shares after its 22% fall?

IAG shares have fallen under 100p after a €2.74 billion rights issue was completed to help the company keep its finances on track ahead of a challenging future

• IAG’s capital increase operation was criticised by investors because of the major discount it offered on the share price
• Wall Street consensus is positive on IAG shares with a ‘buy’ rating. Yet fears of a new wave of coronavirus in Europe divides analysts on the price target.

International Consolidated Airlines Group (IAG) shares have tumbled following the completion of a €2.741 billion rights issue on Monday, which aims to fight against the consequences of the pandemic crisis which greatly impacted the airline industry.

IAG’s share price closed yesterday at 100.6p on the London Stock Exchange and is still far from recovered following two days of big losses: down 13.6% on Friday, and another 13.5% on Monday. On Tuesday, IAG stock even touched a 2009 low at 92.44p.

Why IAG’s rights issue panicked its investors

The capital increase of nearly 3 billion new shares was designed to strengthen IAG’s financial state ‘with more resilience, greater flexibility and the ability to make the right operational and strategic decisions for the long term benefit of its stakeholders’, said the company in a statement.

However, it seems that its investors didn’t interpret it in the same way. Like Stephen Furlong, analyst at Davy Research, who was disappointed by the operation and its heavy discount.

He said to the Financial Times that ‘the key was just to raise money no matter what, the price was just a secondary thought’. The nearly 36% discount offer on the new shares was steeper than Furlong had expected and the shareholder dilution was also more than he anticipated.

It seems that the share issue has sent a bad signal to IAG’s investors regarding the British Airways owner’s future. As recently as last week, British Airways chief executive Alex Cruz told MPs that IAG was still fighting to survive.

IAG, which plans to cut 13,000 jobs at British Airways to recover from the pandemic, is expecting its travel capacity to fall 63% in 2020 from in 2019, and to decline 27% in 2021 compared with 2019.

IAG share price outlook remains positive despite coronavirus threat

Its capital hike will certainly help the company to weather the storm which is far from coming to an end, but will it be enough to sustain its share price in the months to come?

Analysts at Berenberg believe that IAG fundamentals are strong enough to expect a recovery of its share price within the next 12 months. Last week, they maintained their ‘buy’ recommendation with a 260p price target, up more than 100% from its current level at 100.6p.

UBS Group also has a ‘buy’ recommendation with a 192p price target. Goldman Sachs and Citigroup are less optimistic, having recently reiterated their ‘neutral’ rating with 140p and 220p price targets.

The disparity of the price target among Wall Street analysts highlights the difficulty to predict the future of the industry as it is completely dependent on the coronavirus pandemic.

Air travel demand has partly recovered this summer, but coronavirus cases have risen again in September, forcing the UK and several others European states to adopt new restrictions in order to contain the pandemic.

A second wave of the pandemic with new lockdowns would be catastrophic for the airline industry. To keep the borders open, and as an alternative to the quarantine rules, the International Air Transport Association (IATA) - which represents around 290 airlines - has called for Covid-19 testing for all international passengers before flights.

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