British Airways owner International Consolidated Airlines (IAG) reported an overall operating loss of €4 billion in the first half of 2020. That compared to a €1.01 billion operating profit in the first half of 2019.

Shares in the troubled airline operator tumbled 8.5% to 165.83p on Friday after reporting a deluge of financial and operating data, confirmed the widely anticipated €2.75 billion emergency cash call, and approved succession plans for its chairman Antonio Vázquez, who will stand down in January 2021.

RISKY FUNDRAISING

IAG already has €8 billion available in liquidity, but it has asked shareholders for extra cash to bolster its balance sheet further. The company is worried about a more ‘prolonged downturn’ in air travel and hopes the extra funding will give it more room to maneouvre when recovery comes.

That won't be until at least 2023, the airline believes, painting a bleak few years ahead for the company and the wider industry. Even so, IAG said that 25% shareholder Qatar Airways has given its support to the cash call and has ‘irrevocably undertaken to subscribe for its pro rata entitlement.’

But retail investors have been warned off backing the new fund raise. AJ Bell investment director Russ Mould said investors would be taking ‘considerable risk’ by participating in the rights issue and backing IAG in its ‘darkest hour’.

EMPTY PLANES

Passenger revenue fell 60% to €4.1 billion as passenger volumes fell 98% between April and June,  while the airline’s costs excluding fuel rose over 68% to €8.26 per available seat kilometre (ASK) compared to €4.89 per ASK in the first half of last year.

AJ Bell's Mould said that while investors will inevitably get heavily discounted shares to compensate for the risks, he added that it will ‘take a leap of faith’ to look past the company’s ‘horrific’ first-half operating loss of and its guidance for when life will return to normal.

‘A cash injection will give the British Airways owner short-term breathing space, yet the pace of the airline sector recovery is out of its hands,’ Mould said, dependent as it is on how the coronavirus plays out and government decisions on travel restrictions, quarantines and lockdowns in case of new flare-ups.

‘BILLION DOLLAR ROUTE’ IN DOUBT

He added that investors also need to consider whether there will be an appetite to travel once the crisis eases, particularly from business travellers, who make up a sizeable portion of IAG’s sales.

The British Airways route between London Heathrow and New York’s John F Kennedy airport has long been known in the aviation industry as the ‘billion dollar route’, because that’s how much it has generated in revenue for the airline in the past.

The route is dominated by business travellers flying between the two cities, which are the two biggest financial hubs in the world, but going forward there’s the risk it might not generate anywhere near the same levels of revenue again.

Mould said, ‘There is a big question mark over how much flying this market will need to do, given how this year we’ve become accustomed to talking to people around the world by video calls.’

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Issue Date: 31 Jul 2020