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Could IAG shares crash out of the FTSE 100?

IAG shares are surfing perilously close above both penny stock status and a humiliating demotion.

IAG (LON: IAG) shares are down 10% over the past month, 35% year-to-date, and 77% since its pre-pandemic 457p to just 104p today.

But as the flight cancellations mount up, the FTSE 100 stock could have much further to fall.

IAG share price: cancellations crisis

While IAG owns several airline brands, its most important is British Airways. And BA is being hammered by a PR nightmare that has raged for months.

Its twin problems are the long-term IT issues that have been troubling the company since at least 2013, and its staffing crisis exacerbated by airport recruitment problems.

Like most airlines worldwide, IAG is struggling to rehire the thousands of staff axed during the pandemic. For context, ONS statistics show that for the first time, there are currently more job openings than there are people unemployed.

With the Omicron variant behind it, and the pandemic fading into the background, IAG had pinned its hopes on a strong summer recovery. But these hopes began fading fast after 1,500 flights were cancelled in April, amid a disaster of luggage problems and customer complaints.

However, CEO Luis Gallego defended that the ‘travel industry is facing challenges as a result of the biggest scaling up in operations in history and British Airways is no exception.’

But far from improving, the situation appears to be going from bad to worse. The FTSE 100 airline has now cut 10,300 more short-haul flights between August and the end of October. Overall, one in seven, or close to 30,000 flights, have been removed from BA’s schedule between April and October.

Which? Travel editor Rory Boland believes the cancellations a ‘damning indictment…BA has continued to promote and sell flights it could not fulfil, even as thousands of customers have faced the chaos of cancellations in recent weeks.’ Worrying, the editor argues that ‘the CAA must take action if BA fails to meet its legal obligations.’

For its part, the FTSE 100 operator believes the move will ‘protect holiday flights,’ because all 10,300 cancellations are short-haul, meaning affected customers should be able to rebook easily.

British Airways said ‘The whole aviation industry continues to face into significant challenges and we're completely focused on building resilience into our operation to give customers the certainty they deserve.’

FTSE 100 stock: the Q2 question

But this may not be the end of the story, as Heathrow was forced to cancel another 61 flights on Monday. And CEO John Holland-Kaye has warned that ‘to minimise disruption for passengers this summer and will ask them to take further action if necessary.’

For context, data from aviation analytics firm Cirium shows the number of last-minute flight cancellations from the UK increased by 188% in June 2022 compared to June 2019.

With Q2 results coming on 29 July, investors are bracing for another disappointing set of figures. The FTSE 100 airline already made an operating loss of €731 million in Q1, though as Gallego noted, this was ‘down significantly’ from Q1 2021’s loss of €1.077 billion.

This left its debt pile at the end of March at a whopping €11.59 billion, nearly double its £5.2 billion (€6.1 billion) current market cap. And while IAG had planned to ramp up capacity to 90% of pre-pandemic levels by Q4, a revision of this estimate could send IAG’s share price into freefall.

Moreover, even if IAG gets its house in order after summer, it will then be competing for diminishing consumer discretionary income, with inflation set to exceed 11% in October, and annual energy bills predicted to hit £3,244 according to Cornwall Insight.

Further, former CEO and current Director General of IATA Willie Walsh has warned that ‘flights are getting more expensive because of the high price of oil and it has been clear to everybody that will be reflected in higher ticket prices…oil is the single biggest element of an airlines’ cost base.’

While IAG is 60% hedged for jet fuel in 2022, 2023 could see the airline caught between a rock of increasing costs and a hard place of cash-strapped consumers.

And with only £600 million in market value separating the FTSE 100 airline from the FTSE 250’s top stocks, a further IAG share price correction could see it exiting the UK’s premier index.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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