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IAG shares fall close to rights issue price whilst BALPA claims easyJet could go bust in 2021

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IAG, the parent company of British Airways, suffered a sharp fall in its share price this morning. At 10.45am the price was down 14% to 95p.

The reason this matters is that the share price is now getting very close to the 84p (€0.92) price of the current €2.75 billion rights issue.

If you are an IAG shareholder, you should be thinking very carefully about committing to purchase additional shares at 84p. The market price could well fall below 84p shortly, leaving you sitting on an immediate paper loss.

The deadline for deciding whether to take part in the rights issue is only a few days away. This leaves shareholders in a tricky position.

The good news is that IAG is guaranteed the money regardless. The banks arranging the rights issue have agreed to buy all unsold rights, irrespective of how far the IAG share price falls, so the airline will receive the full €2.75 billion.

easyjet cfo we will be insolvent by next Autumn

easyJet reported as saying that the airline may not survive 2021

To give you an indication of how bad things could get, I was sent an audio transcript of a conference call for easyJet pilots. The union reps were explaining what they claimed to have been told last Tuesday by easyJet management:

bookings for Winter 2020 are “even worse than management’s worst fears”

The airline did own 80% of its fleet. This is now down to 50% and a further batch of sales may be on the way. Aircraft sales generate some cash but immediately trigger on-going mortgage payments.

easyJet is likely to operate no more than 90 aircraft in the UK over the Winter, compared to previous plans for 110+, so additional redundancies may be required

Flights which will operate next year are being filled by passengers who took vouchers for cancelled flights in 2020. Any quoted figures for 2021 loads do not necessarily reflect money coming into the business.

The airline is at risk of insolvency if it does not have a good Summer next year.

For clarity, these comments are from a report by BALPA reps based on a meeting with easyJet management. You need to make a judgement as to their accuracy.

Comments (93)

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  • Andrew says:

    However, Competition and Markets Authority has extended the terms of the current IAG / American Airlines transatlantic join business agreement by three years due to Covid uncertainty, so maybe that will up the share price.

    • Rob says:

      As per the article we did over the weekend, the long run outcome is probably worse. In 3 years there may be no Virgin, no Norwegian and JetBlue may have given up on launching. The CMA will almost certainly break up the JV if that happens.

      • RussellH says:

        I really would not be so certain about the JV being broken up in the future.

        If the bottom falls out of the transatlantic market in the long term, resulting in a permanent drop in the number of flights, then the JV will be the only way that passengers will retain a reasonable choice of routes. Were I to be the CMA and/or the EU Commissioner responsible, I would make that a condition of the JV continuing to operate.
        If the JV were broken, then I can see the potential for airlines to retrench to LON/PAR/FRA to NYC/CHI/LAX only.
        Competition is not always a good thing. After all, it is inherently wasteful of resources, and requires significant outlay on marketing, which has to be paid for out of fares.

        • ken says:

          “Competition is not always a good thing”

          No. Just no.

          • RussellH says:

            Just because a badly run, lazily or non-existently regulated monopoly is bad, there is no reason at all why, in many situations, a well run and well regulated monopoly cannot be better for everyone. That bosses and regulators need to ensure that a monopoly serves customers and employees fairly should be a given.
            Competition, though, certainly does not ensure that.
            Without wasteful competition customers get better prices because there is no need for a marketing budget and scarce resources are not squandered on duplication of services.

            We have plenty of competition-free organisations in this country. We could have two or three competing electricity grids, would that be a good idea? The same applies to water and gas networks.
            There is so-called competition in postal services, but it is nothing of the sort. The Royal Mail is starved of the best value parts of its business, while others ‘compete’ for the easy pickings. This is a scandal.

            And surely you would not want competition for policing or the armed services?

        • ken says:

          But you weren’t talking about the armed services, police or utilities.

          You were talking about Air travel – just the 40 years of empirical proof that competition (almost literally) decimates prices.

          • RussellH says:

            Not true. I was talking generally.
            You were the one who implied that competition is always a good thing (no mention of air travel).

            Nevertheless, I do think that travel is frequently much better off without competition.
            Highly profitable services can (and in my opinion should) cross-subsidise less profitable or unprofitable ones, but this is almost impossible to enforce if competition is given a free reign.

          • Crafty says:

            RussellH, your examples are all widely held as “natural monopolies”; I am not sure air travel is recognised as such.

        • Paul Pogba says:

          The only area where competition is inherently inefficient is natural monopolies. The country has far too many idealistic Marxists.

          • RussellH says:

            I do not know if you want to try and be insulting, but “Marxist” is not an insult in my book. Often misguided, maybe.
            But please, explain how competition is **always** better rather than just stating what sounds like a belief.

      • Journeying John says:

        What other industry would an officially sanctioned & be approved oligopoly be allowed… On the most profitable product in the sector. The joint venture has enhanced profits and diminished both the customer experience and value for money.

  • TGLoyalty says:

    Market is reacting to the second national lockdown rumours this morning. The 11am briefing could swing things either way.

    At the start of last week taking the rights issue was a no brained but agree it’s very close right now. Really depends on your risk appetite.

    • Andrew says:

      Although the 11am briefing isn’t with politicians so unlikely to be policy change – it’s more of a telling off that we aren’t taking it seriously and an explanation on the current numbers etc. Mayor of London says that London is 2 or 3 days behind the North East. I think the 11am briefing is a set up for a later announcement from government on restrictions.

      • ChrisBCN says:

        I think you are exactly right Andrew, prepare and soften us up before tighter restrictions

      • TGLoyalty says:

        I know no politicians but it’ll have a narrative which will lead you to make some assumptions for what’s coming.

        Looking at a graph of positive cases in April and one now is a useless piece of information as the testing regime was completely different.

        • ken says:

          we look like we are 3 weeks behind France.

          Yes the daily cases compared with April is meaningless – but the number of deaths won’t be.

          I’d imagine 30, 40 deaths a day might be “acceptable”, if we can keep the economy going and NHS open.

          300 – 400 deaths certainly won’t be.

    • Rob says:

      It is NEVER a ‘no brainer’ to take up a rights issue a week before the closing date!

      Do it at the last minute. You have literally nothing to lose but quite a bit to gain in case something bad happens in the interim.

    • marcw says:

      Really? The IAG stock has been falling constantly since last Monday.
      Problem is the situation in the aviation industry is damn complicated and this winter season is going to be a massive challenge.

      • TGLoyalty says:

        Actually it held steady around 130 until Friday open then dropped off a cliff.

  • marcw says:

    Good for folks that sold their rights on first day. Soon they’ll buy shares for the price they sold rights for.

    • mr_jetlag says:

      I sadly took up my full rights (although ofc you can reset election until tomorrow), the sun was shining last week and I was infected with a bad case of optimism.

      At this stage it seems the logical choice for existing shareholders is to let your rights expire without value and see if the share price recovers.

      • ken says:

        “logical choice for existing shareholders is to let your rights expire without value and see if the share price recovers”

        The rights still have a small value – about 21p per orginal share I think. So sell them. Don’t think you get anything to just let them expire.

        • mr_jetlag says:

          @ken – I meant as opposed to taking up the rights and purchasing the additional IAG shares with cash. You can obviously sell now or let your broker sell them in bulk tomorrow (as I see HL is doing). I’m not a day trader and the position is de minimus for me so better to just let the market do what it does.

          • Ken says:

            Sorry it was just a kind of a reminder to any one who might not have them in a nominee broker like HL, that if they do nothing, they get nothing.
            Pretty sure that’s the case if you started with a paper share cert. and it’s now recorded by computershare.

          • mr_jetlag says:

            No worries, I wasn’t clear in my response either 🙂 my base case is that the share price and rights price will meet up, but am broadly optimistic that IAG will survive (vs other players) so have taken up my rights.

            Others may choose to average down losses (lets face it anyone with rights has taken a paper loss already!) and so are right to sell. It depends on your outlook, but I agree for the direct shareholder they need to take up their rights or find a market in the next couple of hours…

    • RussellH says:

      Often a good policy, I agree.
      Done so a few times and never regretted it.

  • R says:

    In my experience the trading price always seeks out the issue price (and then often somewhat lower). Been through so many, most recent was TED. Flog holding on day 1 following the Ex date, take them up if … well, what Rob said.

    • Lady London says:

      If they get the pricing right on the rights issue isn’t that how it is supposed to work?

      • Ken says:

        Not really. The theoretical ex rights price was about £1.35 and roughly that’s where it settled a week ago.
        Events just have subsequently made IAG prospects (and all airlines) look worse.
        EasyJet & IHG share price have also been battered in the last week.
        Pretty soon IAG shares might even be worth buying!

  • Nick says:

    Not fully understanding how this works, so apologies if this is a dumb question… but if the banks have agreed to fund it regardless, who’s ultimately paying? Could they effectively take a loss themselves, or does BA effectively have to pay them in banking fees?

    • Rob says:

      The banks take a loss.

      However, they will have been paid around €100m for arranging the rights issue (which effectively is no more difficult than sending out a few letters) so don’t be too concerned for them. Banking remains a licence to fleece your clients.

      Assuming the share price pops back above 84p they will even be able to sell at a profit at some point.

      • C says:

        Fees are disclosed in the prospectus for the IAG rights offering (available on IAG’s website) as 2% plus discretionary fees of up to 0.25% (and not payable on the shares being subscribed by Qatar Airways), which the fee summary calculates as eur52 million. This is much less than the eur100 million Rob cites. The fees are the price of the guarantee for the issuer of getting the targeted funds, and for the banks compensation for the risk of the underwriters owning the shares, instead of investors. The underwriting banks will likely have paid on a portion of those fees to hedge funds and others who are sub-underwriting some of the risk (i.e., effectively pre-agreeing to purchase any shares remaining with the underwriters after a placing in the market of the unsubscribed shares, if any). Rights offerings are not always easy money for banks – ask anyone who was involved in the RBS, HBOS or other offerings back in 2008, or recapitalising the Greek banking sector, or any number of other stressed situations. As others have noted, if the trading price is below the price of the new shares at the end of the subscription period, rational shareholders will sell the rights and buy shares in the market, leaving the underwriters with the shares at the issue price, and taking a loss if they are resold below the issue price (and none will want, or likely from a regulatory perspective be able to, hold the shares for any notable period of time).

        At the time of writing the trading price is eur1.04/share, against an issue price of eur0.92/share, so still a bit of leeway.

  • Mr. AC says:

    Question to the experts – if I buy IAG stock right now, I can still decide to take part in the rights issue tomorrow?
    And if I buy it on Wednesday – it won’t have any right-issue-related rights attached to it anymore? If the previous owner hadn’t exercised their rights, they would be the one receiving the proceeds of the sale of their rights at some point in the future, not me?

    • John says:

      No, you had to hold the shares by end of trading on 11 Sep

    • AJA says:

      Even if you buy shares today they will be ex-rights so the former owners will get the cash due under the rights issue. From what I understand the option is to take the shares up at the rights issue if you held shares in early Sep or just receive the pay out as the banks take up any unsubscribed shares. You can’t buy new shares today to take part in the rights issue.

  • Novice says:

    HL are saying they will sell on behalf of all their clients if we let the rights expire. Is it better to sell personally before tomorrow or wait for them to expire and let HL do it as a group sell?

    You all are way more experienced than me so asking genuine opinions…🙏

    • John says:

      If the share price drops below 85p the rights will be worthless – if you think that is going to happen then you should sell now while you can still get something.

      Or maybe you think the share price will jump back up after tomorrow but before Friday?

    • AJA says:

      HL will sell on your behalf if you are a BA shareholder via HL. No need for you to do anything unless you want to buy the shares, in which case do it today, otherwise HL will sell tomorrow.

  • Anna says:

    EasyJet not really doing themselves many favours – still charging swingeing prices during school holiday periods. I’m looking at bookings for next year but put off by such high prices when travel is still so uncertain.

    • Anna says:

      Especially as schooloing is currently so chaotic I can envisage parents taking kids away in term time and I doubt the schools will even notice, let alone issue any fines!

      • ken says:

        I’d imagine the prices will drop for bookings for end of school holidays.

        No one will want to have their kids quarantine for 1st 2 weeks of term

      • The Savage Squirrel says:

        Indeed. Getting a 2 week window out of school is not exactly tricky… “Hi school – cough cough cough – we’ve just been told we need to isolate for 14 days – should I still send little Billy in?”

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