Airlines have become prone to calamity, the August bank holiday air traffic control chaos being the latest example. Shareholders in International Consolidated Airlines Group have needed particular patience, since the grounding of flights during the pandemic gave way to a collapse in revenue and a debt mountain, swiftly followed by punchy cost inflation.
But the fog is starting to lift. Demand from holidaymakers has snapped back faster than capacity within the airline industry. For the British Airways owner, fares in the first six months of the year were up almost 10 per cent and capacity was back at 94 per cent of 2019 levels. By the end of the year, it reckons it can boost that number to 97 per cent. Revenue and pre-tax profits for this year are forecast by analysts to be higher than for 2019.
It is now back generating cash rather than burning through it, churning out €2.26 billion in free cash in the first half after making debt payments. Crucially, it has been able to reduce leverage faster than previously thought, reducing net debt to €7.6 billion, or a reasonable enough 1.5 times adjusted profits, by the end of June. This is substantially lighter than the €12.1 billion weighing on the balance sheet two years earlier and back at roughly pre-pandemic levels.
There’s no sign of demand weakening, either, despite cost of living pressures. Bookings of 80 per cent of revenue for the third quarter and 30 per cent for the seasonally quieter final three months are both slightly ahead of the norm.
Jet fuel prices may have risen in recent weeks, but they have fallen by a third from last summer. The group has hedged 67 per cent of its exposure for the rest of this year and just over 40 per cent for next year, but that could give it the chance to lock in at lower rates if the trajectory of fuel prices continues to head south.
Wage inflation is still heightened. British Airways agreed a 13.1 per cent pay rise with its employees last month. But non-fuel costs overall are expected to fall by between 6 per cent and 10 per cent this year.
The shares, though, have struggled to take off. A share price that is three quarters lower than the pre-pandemic level partly reflects a €2.75 billion rescue rights issue in 2020. But incumbent players such as IAG have never been highly rated by the market. An enterprise value of 3.5 times forward earnings before interest, taxes and other charges is only a touch below a long-running average of 3.7 before the pandemic.
Legacy airline groups have lower structural growth in front of them, expanding through acquisition rather than the rapid fleet-building being pursued by the likes of Wizz Air or Ryanair. Low-cost carriers have been eating their lunch in the short-haul market. Investors are reluctant to stump up more for operators whose earnings are inherently volatile.
For IAG, expansion is more complicated than usual. It has €15.6 billion in cash and available debt facilities at its disposal. A deal to buy the remaining part of Air Europa it does not own is yet to receive regulatory approval. Given rising interest rates, bigger merger plans could be unpalatable for investors. It also needs to finance the rebuild of its fleet, after BA and Iberia have retired their older 747 and 340 aircraft.
Much of the €4 billion earmarked for capital expenditure this year is to be put towards aircraft orders. Expansion has been made harder across the industry by shortages in parts and labour for Boeing and Airbus, the aircraft builders, but that could also keep capacity tight and fares higher for longer. Half-year figures prompted a wave of upgrades by analysts. If third-quarter numbers indicate air fares are holding firm, forecasts could rise again.
ADVICE Hold
WHY Tighter capacity in the market could keep air fares higher for longer
Liontrust Asset Management
Asset managers bunching together for safety against the march of passive funds is logical. Liontrust Asset Management’s choice of GAM, the troubled Swiss funds group, was not. In the end, only a third of the GAM’s shareholders voted in favour of its attempted acquisition of the scandal-hit company.
The shares remain a fifth lower in value since the deal was announced in May. Recovering the losses may not happen soon, analysts at Numis point out. Management credibility may be one impediment, bearing in mind brand damage in the wake of the failed deal; then there is the question of how recoverable is the £18 million loan, equivalent to about 28p a share, made to GAM. Liontrust has said it has the right to demand immediate repayment of one part of the loan, equating to £8.9 million plus interest, on September 28, 30 days after the deal failed.
A lack of clear catalysts is reflected in Liontrust’s lowly valuation. The shares trade at eight times forward earnings, close to the fourteen-year low hit in the wake of last year’s mini-budget chaos. The rejected takeover is not the only thing that has caused the market to sour.
The three months to the end of June marked its sixth consecutive quarter of net outflows, when clients withdrew a net £1.6 billion in capital from Liontrust funds. True, a relative improvement in the performance of its funds is ground for some encouragement. On a one-year basis, 13 of its 38 funds were in the bottom half of their peer groups, compared with 23 on a three-year basis.
However, given its bias towards equities, Liontrust is exposed to the same challenges faced by stockpickers against cheaper, index-tracking alternatives. It’s still attempting to diversify other leanings within the business towards UK distribution of its funds and a predominantly retail client base. Without a deal, progress is likely to be slow.
It will escape the chop from the FTSE 250 index in the latest reshuffle this month, but only just. A cheap price means that Liontrust could become prey rather than hunter.
ADVICE Avoid
WHY Persistent net outflows and competition could weigh on sentiment
