IAG Could Hold Out Until Q3 2020: Its Cash Position Is Solid

50 percent of IAG's operating expenses are variable

Renta 4 | The present difficult conditions caused by Coronavirus prevent the IAG directive from announcing an estimated operational performance guide for 2020. In principle, the most complicated months should be April and May.

In Q1, the drop in traffic (-7.5% vs. Q1 19) was focused in February on Asia and in March on all markets. For April and May, the management expects the drop in supply (capacity) to be “at least 75%” compared to the period in 2019. This is despite the fact they see decline in demand being lower.

They are currently assessing monthly cash consumption and are reducing costs in many areas. It should be noted that around 50% of IAG’s operating expenses are variable. And staff costs (around 23% of the total) also have a variable part which will be cut with the announced measures (freezing recruitment, cancelling working hours and implementing unpaid voluntary vacation options).

As for capex, orders are being delayed rather than cancelled for the time being. What does stand out as favourable is the traffic of goods, with strong demand for medical material and non-perishable consumer goods to the U.S. .

The company is waiting to see when air traffic can start to bounce, which will logically have to be preceded by the lifting of traffic bans. In principle, they believe that such a recovery could begin in the second half of May. They are keeping a close eye on all developments and flag that they have the flexibility required to be fully prepared for when this happens.

Nonetheless, some of the aircraft that have been deactivated will not remain in the group when the recovery begins. In Asia they are already seeing an incipient recovery of traffic in some destinations.

In our opinion, it is still too early to know the extent and magnitude of the deterioration caused by the coronavirus. For now, we expect the situation to have normalized by the beginning of Q3’20, the main quarter of the year for the industry.

We believe that many airlines will have serious financial problems and that some will even have to ask for State aid to continue operating. We do not think this will be IAG’s case as it has a strong cash position: cash and liquid assets of EUR 7.35 billion and credit lines of EUR 1.9 billion, totalling EUR 9.3 billion in liquidity.

The air traffic impact in Q2’20 will be “very” significant and the priority now is to reduce variable operating costs by a big margin and to reduce cash consumption.

We are confident that IAG will be effective in this task. And in this respect, we welcome the fact that Willie Walsh, CEO, has postponed his retirement. The key for the industry and IAG is to be prepared to take advantage of the beginning of the recovery.