The International Consolidated Airlines (LSE:IAG) share price has shot up nearly 50% since the start of February. Why? Because the UK government recently announced the easing of lockdown restrictions in England. And a part of the proposed roadmap includes the return of international holiday travel.
Needless to say, I think this would have meant a massive sigh of relief from IAG, as well as the entire travel sector. But is the stock worth adding to my portfolio at its current share price? Let’s take a look.
The IAG share price is rising
Shortly after the announcement, package holiday provider TUI reported a 500% surge in bookings. Unsurprisingly, it looks like there’s significant demand to go on holiday. After a year of confinement, this makes perfect sense to me.
With planes expected to return to the skies in May, the IAG share price has taken off. But despite this increase, the stock is still trading significantly lower than pre-pandemic levels, suggesting there’s plenty more space for it to grow as the company recovers.
However, even if the company can return to maximum passenger capacity this year, Covid-19 has still significantly impacted its health.
Covid-19 did some damage
The airline industry has been one of the most heavily impacted sectors by the pandemic. With most flights being grounded, airline stocks like IAG have been forced to raise additional capital to keep the lights on. Let’s not forget that even when planes aren’t flying, there are still expenses to pay, such as airport and maintenance fees.
In 2020, IAG took on another £2bn of debt, increasing its total annual interest payments by 9% to £538m (€623m). When combining that expense with lease agreements for its fleet, almost 92% of pre-pandemic underlying profit is gobbled up. Furthermore, as part of the new loan agreements, significant restrictions have been placed on shareholder dividends. As a result, they are not expected to return until 2023.
Despite the weakened balance sheet, IAG has proven to be more resilient than some of its competitors. Norwegian Air and Virgin Atlantic have both pulled out of the long-haul flight market almost entirely, thereby creating new opportunities for IAG to grow, along with its share price.
The bottom line
The easing of lockdown restrictions is undoubtedly fantastic news and appears to be the primary catalyst behind IAG’s share price increase. But IAG is an international business, and the removal of travel restrictions only applies to the UK so far. If other countries don’t reopen their borders quickly, there aren’t going to be many destinations to choose from.
Personally, I think it’s still too soon to invest. Current estimates from the International Air Transport Association suggest that the industry won’t fully recover until 2024. And if those forecasts are accurate, IAG may struggle to keep up with its newly increased interest payments. For now, I won’t be adding the stock to my portfolio, but it’s definitely on my watchlist.
