Where next for IAG shares post Q1 results as recession looms?

After reporting Q1 results, IAG (LON: IAG), parent of British Airways, Iberia, Aer Lingus, and Vueling, has seen its share price sink by 8% to 132p today.

Now down by 71% since mid-January 2020, the embattled FTSE 100 airline stock remains far from recovery unlike the wider FTSE 100. And despite expecting strong customer demand to drive profitability from Q2 onwards, its expected summer boom is now looking precarious.

IAG share price: Q1 2022 results

IAG suffered another operating loss of €731 million, though in CEO Luis Gallego’s words, this was ‘down significantly’ from Q1 2021’s loss of €1.077 billion.

Cash was €8.18 billion, ‘with significantly positive working capital, driven by bookings for the remainder of the year.’ Including additional financing facilities, IAG’s total liquidity increased slightly to €12.36 billion. However, despite reducing its net debt by 0.6%, the pile still remains at a depressive €11.59 billion.

The airline noted that the Omicron variant had a ‘negative short-term impact in January and February,’ but cited the easement of government-imposed travel restrictions, especially in the UK, as the source of ‘improved travel demand.’ Moreover, it had ‘no noticeable impact from the war in Ukraine.’

And encouragingly, passenger capacity remains on an upwards trajectory, up to 65% compared to 58% in the prior quarter. And it plans to ramp up capacity to 90% by Q4, for an overall capacity level of 80% in 2022. And for the all-important North Atlantic routes to the US, it expects to be close to full capacity by Q3.

Gallego noted that ‘demand is recovering strongly…we expect to be profitable from the second quarter onwards and for the full year.’ He further enthused that ‘premium leisure continues to be the strongest performing segment and business travel is at its highest level since the start of the pandemic.’

Where next for IAG?

Positively, CFO Steve Gunning has previously noted that the airline is 60% hedged for jet fuel for the year, providing some margin protection as the cost of jet fuel soars. And pressure from Germany and France to spin off BA under EU ownership rules seems to be on the back burner for now, in the face of more pressing geopolitical concerns.

But despite the positive rhetoric, IAG seems to have a history of promising jam tomorrow. In particular, it has repeatedly highlighted summer 2022 as a bright spot for recovery.

But IAG’s crown jewel, BA, has been hit hard by legacy IT issues and staffing problems, which has seen more than 1,500 flights cancelled in April alone, luggage problems and widespread customer dissatisfaction.

Having spoken to BA CEO Sean Doyle, Transport Secretary Grant Shapps highlighted that the airline has ‘growing pains in lots of different directions…in a very, very tight employment market.’

Gallego notes that ‘travel industry is facing challenges as a result of the biggest scaling up in operations in history and British Airways is no exception.’ The airline’s focus is now on ‘improving operations and customer experience and enhancing operational resilience.’

But with nimble competitors including easyJet and Ryanair, the case for BA’s premium pricing remains on edge. Accordingly, Peel Hunt has halved its forecast for IAG's annual profit in 2022 from £839 million to £416 million.

In addition, the Bank of England has forecast that inflation will hit 10.2% in Q4 and expects the UK will slide into recession. The cost-of-living squeeze is about to tighten for swathes of IAG’s customers. Historically, holidays abroad have been one of the first luxuries to be cut from household budgets.

The FTSE 100 airline is assuming that pent-up travel demand will trump the wider recessionary factors. If it’s right, the IAG share price could soar by the end of 2022. But this optimistic outcome is far from guaranteed.