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IAG: Don't Rush To Buy Shares Of British Airways Owner

Published 06/18/2021, 02:07 AM
Updated 09/02/2020, 02:05 AM

European Union countries have been gradually easing restrictions to welcome vaccinated travellers from countries “with a good epidemiological situation.” Wanderlusting tourists from the US should soon be able to visit many of their favourite European cities, especially if they are fully vaccinated.

Meanwhile, the UK has implemented a color-coded travel system, with safety levels that follow the norms associated with traffic lights (i.e., red, amber and green). And it is cautious about putting new countries on the green list. In fact, to the dismay of British tourists hoping to visit Portugal, that country was recently downgraded to amber from green.

Global and regional airlines are hopeful more people will be able to take to the skies in the coming weeks, with recent numbers from the US being encouraging.

According to the daily traveller numbers released by the Transportation Security Administration, the number of air travellers in the US has started to climb. On Monday, June 14, the traveller throughput was 1,800,954. By comparison, exactly a year ago, the number was 534,528. In 2019, it had been 2,669,580.

Although the number of air travellers is still below pre-pandemic levels, travel and leisure companies are excited about the reemergence of travel. As a result of the positive mood, shares of travel and tourism businesses have had a good year so far in 2021.

Year-to-date, the Dow Jones Travel & Tourism and the Dow Jones Airlines indices are up about 3.4% and 22.8%, respectively. Similarly, since the start of the year, shares of American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL) and United Airlines (NASDAQ:UAL) have returned more than 44.3%, 13.2% and 27.9%, respectively.

Despite the recent optimism, the future still holds uncertainties for airline stocks. Today, we look at FTSE 100 member International Consolidated Airlines Group (LON:ICAG) (OTC:ICAGY). In the past 52 weeks, ICAG stock returned 11%, while YTD is up about 22%.

ICAG Weekly Chart.

On June 16, the shares closed at 200.3p ($5.56 for the US-based shares). Its market capitalization is £9.9 billion (or $13.8 billion).

IAG: A Uniquely Structured Airline

International Consolidated Airlines, one of the world's largest airline groups, was launched in 2011. The Spanish-registered group is better known as the parent company of British Airways, Iberia, Aer Lingus, Vueling and Level—a recently launched new airline. Shares are traded on the London Stock Exchange and Spanish Stock Exchange.

The group has a fleet of 533 aircrafts. In addition to the airlines above, the IAG Platform includes the IAG Cargo, IAG Loyalty, IAG Global Business Services (GBS) and Avios businesses. Before the pandemic, operations extended to 279 destinations, carrying around 118 million passengers each year.

Management released first quarter results on May 7. Total revenue was €968 million (or $1.17 billion), down 78.9% year-on-year (YoY). Passenger revenue declined 88.4% YoY to €459 million (or $556.5 million). Meanwhile, cargo revenue increased by 42.3% YoY to €350 million (or $424.4 million)

Net loss after tax was €1.1 billion ($1.3 billion) compared with a loss of €1.7 billion ($2.1 billion) for the same quarter in the previous year. As of Mar. 31, the airline group had strong liquidity at €10.5 billion ($12.7 billion). Cash was €8.0 billion ($9.7 billion), up €2.1 billion ($2.5 billion) compared to the previous quarter. Net debt at the end of Q1 was €11.6 billion ($14 billion).

CEO Luis Gallego said:

We’re taking all necessary actions to ensure the financial health of our business for the long term, including last year’s successful €2.7 billion capital increase, and remain focused on reducing our cost base and increasing efficiencies.

Recent International Air Transport Association (IATA) metrics indicate an improvement in early bookings for June-August travel period. However, new COVID-19 variants still remain a major concern. Thus, IGA did not provide a trading outlook due to “uncertainty over the timing of the lifting of government travel restrictions and the continued impact and duration of COVID-19."

Bottom Line

In February 2020, before the pandemic reached Europe, ICAG shares were hovering at 450p. Now, they have more than halved. The stock could look undervalued, but given the shares are already up more than 20% in 2021, we dont think there is much upside potential for the coming weeks.

The recovery in air travel still remains uneven and there might be more headwinds on the way. For example, the UK government recently announced the extension of various restrictions by four weeks. We believe ICAG stock would offer better value around 185p, or even below. So for now, we would patiently wait.

Finally, investors who want to invest in the travel and leisure sector but do not want to commit full capital to ICAG stock, might consider buying an exchange-traded fund (ETF) that provides exposure to the airline and similar travel businesses. Examples include:

Invesco Dynamic Leisure and Entertainment ETF (NYSE:PEJ): up 30.7% YTD;

SPDR® S&P Transportation ETF (NYSE:XTN): up 22.6% YTD;

US Global Jets ETF (NYSE:JETS): up 39.4% YTD.

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