The IAG (LSE: IAG) share price has started to recover over the past few weeks. And there are a couple of reasons why investors have been buying back into the airline group.
The reorganisation of the UK travel traffic light system, the upcoming reopening of the lucrative transatlantic route and the growing number of passengers returning to the skies, are all reasons why investor sentiment towards the British Airways owner has begun to improve.
Whenever I’ve covered IAG in the past, I’ve always tried to explain that the company’s fortunes will depend on how quickly the global aviation market recovers. Many green shoots are appearing, and IAG should be able to capitalise on this.
However, there’s one significant factor that could hold back the group’s recovery.
IAG share price headwinds
IAG has a substantial financial liability on its balance sheet and I’m not talking about the group’s debt.
The group giant is responsible for BA’s two pension schemes, which are some of the largest in the country. Together, the assets of these two defined benefit schemes, which have 85,000 members in total, amount to nearly £26bn. To put that into perspective, the market capitalisation of IAG at the time of writing is just £9.2bn.
The schemes are in deficit and pre-pandemic, the group was working through a plan to eliminate the gap between assets and liabilities. When the pandemic struck, the trustees agreed that BA could defer £450m of pension contributions. This deal ended at the end of September.
Now the company faces the task of having to resume pension contributions of £35m each month from 1 October. This couldn’t have come at a worse time. IAG is still losing money hand over fist, and it’s unclear if the aviation industry will ever return to 2019 levels of activity.
On top of this, the group’s facing increasing competition from lower-cost competitors, which have cleaner balance sheets and newer fleets. Therefore, they’re better positioned to fight for customers.
A challenge to return to growth
The company’s facing some significant challenges, which will make it harder for the group to return to growth. And these threats could act as a weight on the IAG share price for the foreseeable future.
That said, as I noted at the beginning of this article, the reopening of the transatlantic trade route is positive news. IAG was also planning to increase the number of flights in the fourth quarter. If occupancy on these flights increases, the company’s prospects will improve.
As a recovery play, I think the IAG share price has some attractive qualities. That’s why I’d buy the company as a speculative investment in my portfolio.
However, considering the risks outlined above, this corporation may not be suitable for all investors. It could be several years before the stock returns to pre-pandemic levels as the company battles through the above headwinds.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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