JP Morgan cuts IAG rating on uncertain outlook

JP Morgan cut its rating on British Airways owner IAG to 'neutral' because of the airline group's exposure to long-haul flights and Covid-19 hotspots in the Americas and the threat of industrial action.

The bank said IAG, which also owns Iberia and other Spanish airlines, has a strong portfolio and respected management but that its outlook is uncertain. JP Morgan cut its target price to €2.50 a share from a €9 target set in December and reduced its rating from 'overweight'.

The company has been decisive in dealing with the coronavirus crisis, including halving its capital spending plan, agreeing new debt facilities and raising funds from sale and leaseback deals, JP Morgan analyst David Perry said.

After an imminent €2.75bn rights issue IAG will have liquidity to see it through an extreme scenario of 15 months of further lockdown. It is also cutting costs, mainly at BA, Perry said.

However, in 2019 IAG flew 47% of its capacity to and from North America, Latin America and the Caribbean where coronavirus is prevalent. The company also makes up to half its profit from long-haul premium flights that might never recover fully from the crisis, Perry said.

JP Morgan also noted that the Unite union is considering calling strikes at BA in response to the treatment of workers at the airline, which has is cutting thousands of jobs and weakening terms and conditions for remaining workers.

"IAG has a strong airline portfolio and very well-respected management," Perry wrote. "However, given a challenging and uncertain outlook (both near- and medium-term) we move our rating to neutral. As we enter autumn we are tactically cautious on all airlines as we expect fading leisure traffic and only anaemic business traffic."

He said on a relative basis he preferred Wizz Air and Ryanair because both had strong liquidity and scope to take market share and reduce costs.