Willie Walsh’s crisis refueling may only delay the inevitable. The outgoing IAG CEO said on Friday he would raise € 2.8 billion of capital. But unless three of its largest markets soon lift the restrictions, you may need a public bailout.
The moment chosen is unfortunate. The airline confirmed on July 24 that it was considering increasing capital. Just a few days later, London announced a two-week quarantine for passengers from Spain. The restriction caused the share to drop more than 9% on day 27, making the expansion more diligent.
At first glance, the decision to go ahead with an offer of rights might seem puzzling. IAG had 8.1 billion euros in reserves at the end of June to pay for the operation of aircraft, personnel and fuel. But the group reported $ 1.4 billion in losses in April-June, British Airways is only operating 15% of normal, and the weekly cash burn is $ 200 million.
And that leak could accelerate. The UK is considering extending its strict quarantine to other countries, while some states in the US, IAG’s third-largest market, are breaking Covid infection records. It is not surprising that Qatar Airways, the largest shareholder with more than 25%, supports the expansion.
Debt also remains a problem. Although the issuance of shares will reduce the net debt / ebitda ratio from 4.2 to 3.1 times, it will remain above the 2 times necessary to guarantee an investment grade rating.
You may not be able to avoid asking the governments for help. After all, the new capital will only cover 20% of the expected income for the next 12 months. A second wave of infections or a reduction in public programs such as ERTEs could lead to greater losses and further reductions in equity value.
Shareholders will have the opportunity to vote on the expansion on September 8. Then they should prepare for a bumpy landing.