IAG still intends to break-even in Q4 despite bookings being worse than expected

IAG, the parent company of British Airways, launched its €2.74 billion rights issue today. This is, for non-City readers, the raising of fresh money from existing shareholders. No additional bank debt is involved.

The rights issue is fully underwritten by a group of banks which ensures that IAG receives the money even if the share price falls. (Shareholders are not going to buy the new shares if they cost more than the market price for the existing shares.)

IAG’s largest shareholder, Qatar Airways, has already committed to taking part.

IAG also announced a trading update at the same time. I have copied it in full below as I think it is interesting. Bolding is mine.

In summary:

the forecast for passenger volumes for the rest of 2020 is worse than had previously been expected

despite this, IAG expects to break-even (on a cash basis) in Quarter 4

it currently expects 2021 capacity to be 27% below 2019

it continues to see no return to 2019 traffic volumes until 2023

the group has €7.6 billion of available cash and equivalents

Here is the full statement:

“Following an almost complete cessation of new booking activity in April and May, June saw a significant increase in bookings to approximately 30% of prior year levels by the end of the month.

This was driven by the easing of country lockdowns in key home markets and across Europe as well as the gradual reopening of intra-European borders. Domestic travel has led the recovery, followed by international shorthaul and then long-haul travel.

Since July, IAG has experienced an overall levelling off of bookings. Short-haul bookings have fallen slightly following the re-implementation of quarantine requirements by the UK and other European governments for travellers returning from specific countries including Spain.

As anticipated, IAG has seen a delayed recovery of long-haul booking activity, impacted by the continued existence of travel restrictions to many long-haul destinations, including North and South America. Long-haul bookings have seen a modest increase since mid-August.

Where travel markets have reopened without border restrictions and quarantine requirements IAG has been encouraged by the level of pent-up demand that exists for air travel.

As a result of the impact of current travel restrictions and quarantine requirements on booking activity, the Group’s capacity planning scenario for 2020 has been lowered to minus 63% in terms of available seat kilometres (ASKs) compared to 2019 from minus 59% previously.

For 3Q 2020 capacity is expected to decline by 78% compared to 2019 and lower than a decline of 74% in the previous scenario. For 4Q 2020 capacity is expected to decline by 60% compared to 2019 and compared to a decline of 46% in the previous scenario.

For 2021 capacity is expected to decline by 27% compared to 2019, a reduction compared to 24% previously planned.

Despite a lower capacity in 4Q 2020 than under the previous planning scenario, the Group continues to expect that it would reach breakeven in terms of net cash flows from operating activities during 4Q 2020. This is as a result of mitigating actions taken to reduce operating expenses further and enhance working capital.

There has been no change to the Group’s expectation that it will take until at least 2023 for passenger demand to recover to 2019 levels.

There has also been no change to the Group’s downside planning scenario, which was used to determine the size of the Capital Increase. The downside scenario includes a reduction in capacity in terms of ASKs of 66% in 2020 and 35% in 2021 relative to 2019.

IAG considers that further downside to the latest planning scenario is more likely to be in the form of delays or extensions to the recovery trajectory, for example as a result of partial travel restrictions, rather than a return to full lockdown.

IAG has continued to implement its restructuring plans. British Airways is in the process of reducing headcount by up to 13,000. By the end of August, the headcount was reduced by 8,236 due to employees leaving the business and mostly as a result of voluntary redundancy. It has concluded labour agreements with its pilots, engineers and Heathrow customer service staff. In regard to cabin crew, agreement in principle has been reached with Unite and a consultative ballot is expected to start shortly.

Other consultation discussions continue, including with Heathrow ground handling services and cargo operations staff, UK Contact Centre employees and Gatwick based cabin crew. Iberia and Vueling continue to benefit from the Spanish Government’s ERTE furlough scheme, which is expected to be extended into 2021.

Aer Lingus has implemented reductions in salaries and working hours across the airline and expects 250 voluntary redundancies by the end of 2020. IAG expects to report restructuring charges of c.€330 million in its 2020 results associated with employee redundancies.

As at 31 August 2020, the Group had total liquidity of €7.6 billion, comprised of €5.8 billion of cash, cash equivalents and interest-bearing deposits and €1.8 billion of undrawn and committed general and aircraft facilities.

Cash at the end of August included an approximate £750 million payment from American Express, a significant part of which was a pre-purchase of Avios points, as announced on 24 July 2020.”

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