International Airlines Group Share Capital Increase
On July 31st, 2020, the International Airline Group SA (BME: IAG) announced a proposal to “undertake a share capital increase with pre-emptive subscription rights to raise gross proceeds of up to €2.75 billion (the "Proposed Capital Increase")”. On September 9th that has been done through an issuance of approximately 2.989 billion shares at a discounted price of EUR 0.92 per share.
What Is A Share Capital Increase?
This is an operation during which the company issues more shares, in order to raise new capital. The benefit for the companies to undergo this procedure is to raise more capital to finance its growth, improve their balance sheet and reduce leverage. The procedure cannot be done without the approval of existing shareholders. The existing shareholders tend to be offered to be the first ones to buy more stock at a discounted price.
On one hand, existing investors will have their current stock valued less, but they have an option of purchasing more stock at a preferential/lower price. However, there is a window period when they can do that after the release of the new shares. After that, they may lose the discount.
What’s In It For IAG?
IAG believes that this will help the company to increase their liquidity and withstand a more prolonged economic downturn. Also, when air travel picks up again, the Group might take advantage of this move, as their stock price could rise back to the pre-pandemic levels. Some might welcome such a move by IAG, as a part of new investors might see this as a good measure taken by the company, in order to withstand the issues that many airlines across the globe are currently facing, due to the coronavirus. Qatar Airways, which is the largest shareholder of IAG, was in favour of the capital increase, as it also believes that this will help IAG to battle all the lockdown issues, resulting in a sharp decline in passenger capacity. But as Mr Akbar Al Baker said, Chief Executive of Qatar Airways Group: “Our investment in IAG has always been for the long term and we continue to support the Company through these difficult times for our industry. We are confident that IAG will emerge from this global crisis as Europe's leading airline group and we look forward to working closely together to deliver our joint vision to enhance travel opportunities for airline passengers across the globe".
Although additional cash could be seen as a good thing, it is unclear for how long it may help support the Spanish-British joint venture. If the pandemic and the current restrictions remain in place somewhere till the middle of next year, before the start of the 2021 summer season, this may cause even bigger problems for IAG and other carriers. In fact, it seems that IAG thinks that for global passenger demand to return at least to 2019 levels, it would now need a couple of years.
Due to the pandemic, global airlines are forced to cut their costs drastically and IAG is no exception here. The company is already going through cutting jobs of one of its largest owned airlines, British Airways, where they are on track of cutting up to 13000 jobs. Iberia Airlines and Vueling Airlines, also owned by IAG, are also undergoing such job cuts. Despite these harsh measures, the Group is doing all it can to survive the current downturn.
Change Of Leadership
Recently, IAG went through changing its CEO. Willie Walsh, who was previously in charge and also the person responsible in creating a conglomerate between Iberia and British Airways in 2011, left the position to a Spaniard, Luis Gallego. The former CEO of Iberia airlines will now take control of the whole Group, in order to keep it afloat. Some of the main issues for him to battle with will certainly be the ongoing pandemic, continuous job cuts, the Boeing Max situation and the Air Europa deal.
Overall, we can say that the International Airlines Group is still seen as a major competitor to other global airlines. The Group is currently the 6th in the world by total revenue and 7th by market cap. IAG might get all battered and bruised because of the pandemic, but it is still seen as a strong competitor among passenger air carriers. Some might criticize the harsh steps the Group is taking at the moment, but in these difficult times it looks like it is doing all it can to survive.
IAG Technical Outlook
Looking at IAG’s (BME: IAG) technical picture, we can see that after last week’s vote, which was in favour of the share capital increase, the stock opened with a huge gap to the downside on Monday, showing a dilution of the share price. It then recovered somewhat but remains under pressure. The share price may go for a larger recovery, however, IAG is now trading below a short-term tentative downside resistance line taken from the high of September 4th, which may keep a few new buyers from entering. Also, as long as demand for flights does not stabilise, the stock might find it hard to go for much higher levels.
If IAG is able to fill up part of the created gap, it may end up testing the aforementioned downside line, which could halt the uprise. If so, the stock might reverse back down and drop to Monday’s high, at 1.526, or even to Monday’s low, at 1.313. If the later hurdle is too weak to provide decent support and eventually breaks, that would place the share price into the uncharted territory.
Alternatively, if the stock is able to break the aforementioned downside line and then climb above the 2.06 barrier, marked by the low of last week, that could invite more buyers into the game. The stock may rise to the 2.275 zone, which is the high of September 10th. IAG might get a temporary hold-up around there, however if the buyers are still very active, this could lead to a further uprise, where the next potential targets might be at 2.429, or at 2.538, marked by the current highest point of September.
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