IAG shares should brace for even further turbulence

In January, the IAG (LON: IAG) shares were worth a heady 457p. And despite continued turbulence, it could be winging back to this price point soon.

IAG shares: full-year results

Full-year capacity was only at 36% of 2019 pre-covid-19 pandemic levels. But in Q3, it was at 43% of 2019 levels, and by Q4, this metric had risen to 58%. The airline emphasized the ‘the easing of government-imposed travel restrictions as the year,’ and ‘in particular following the opening of the US border to foreign travellers on November 8’ as its key reason behind its improving performance.

However, ‘the impact of Omicron, which became apparent on November 25, had a negative short-term impact on the operating result, passenger bookings and cancellations.’ But the airline told investors that Omicron had ‘a minimal impact on bookings for Easter and summer 2022,’ and expects capacity to rise to 85% of pre-pandemic levels for the current financial year.

IAG reported a full-year statutory operating loss of €2.765 billion. But for context, it lost €7.451 billion the year before. Furthermore, operating loss in Q4 was only €278 million, leaving the FTSE 100 company tantalisingly close to profitability.

CEO Luis Gallego is ‘confident that a strong recovery is underway. Our teams across the Group are taking every opportunity to develop our business while capitalising on the surge in bookings when travel restrictions are lifted.’ And he emphasised that ‘all our airlines continued to show improvements in the fourth quarter,’ highlighting Iberia’s €82 million operating profit.

And excitingly, the company expects ‘to be profitable from quarter two, leading both operating profit and net cash flows from operating activities to be significantly positive for the year.’

Turbulence ahead

However, despite the optimistic tone set by its CEO, IAG shares are likely to remain volatile. Its return to profitability hinges on the assumption of ‘no further setbacks related to covid-19 and government-imposed travel restrictions or material impact from recent geopolitical developments.’

This is a huge caveat. Another variant of coronavirus could disrupt IAG at any time. Pressure from Germany and France for British Airways to be spun-off could hit synergy savings and see its flying capacity collapse. And with the war between Russia and Ukraine escalating, the EU, the UK, USA and Canada have banned Russian planes from their airspace; Russia has responded in kind. With extreme economic sanctions also imposed on Russia, IAG’s recovery plans could become collateral damage.

The airline is also susceptible to the rising price of oil. Brent Crude has hit $113 a barrel, its highest level since June 2014. And the International Energy agency’s agreement to release 60 million barrels of emergency stockpiles has had a limited effect on oil’s soaring price. Russian oil exports account for 8% of global supply; a potential western ban on Russian oil imports could be imminent, sending oil even higher.

Moreover, the cost-of-living crisis is escalating. The UK’S Consumer Prices Index inflation is already at 5.5%. Petrol has surpassed £1.50 a litre for the first time. And with taxes and interest rates both set to rise, consumer cash for plane tickets is certain to shrink.

And IAG’s short-haul operations face stiff competition. Ryanair CEO Michael O’Leary is pursuing a strategy of ‘significant price stimulation at lower prices,’ while easyJet could soon be readmitted to the FTSE 100. Stiff competition for decreasing disposable income means IAG’s flagship carrier, British Airways (BA), is under pressure to justify its premium pricing.

Gallego believes ‘our customers remain at the heart of everything we do. This means investment in passenger experience and operational resilience to provide the best service.’ However, recent reality has been different. Over the past fortnight, frustrated BA passengers have been caught up in a logistical nightmare of lost baggage and flight cancellations caused by Storm Eunice and IT problems.

While BA accepts it has ‘let customers down’ and that it would do everything ‘to make this up to them,’ customers are publicly calling the airline ‘utterly disastrous,’ and ‘truly woeful.’

But IAG remains confident in this summer’s prospects. According to Reuters, it’s reviving plans to purchase up to 50 short-haul planes from Boeing and a further unspecified number from Airbus.

IAG shares have been volatile since the pandemic began. Further turbulence seems inevitable.

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*Based on revenue excluding FX (published financial statements, June 2020).