Unlike songster John Denver, very few of us are Leaving on a Jet Plane. Least of all in the regions that IAG, owner of British Airways, Iberia and Vueling, operates in. It is exposed to the geographies most restricted by the pandemic — Spain, the UK, Ireland and the Americas.
In Thursday’s unexpected update, it said it was grounding more planes and capacity in the fourth quarter would be 30 per cent of what it was last year. It doesn’t expect to return fully to 2019 levels for at least three years. A few weeks ago it had hoped that capacity would be at 40 per cent and its net cashflows would break even. But that was before the second wave, an increase in local lockdowns and extended quarantine requirements in more countries.
Now, the group admits it won’t break even on cash in the next three months.
IAG has done what it should and can to contain the leakage. It is cutting jobs — 10,000 at the last count at BA — and capex. It is restructuring parts of the business and this month raised €2.7bn in new equity to buttress the balance sheet and reduce debt, which stood at a mighty €10.5bn at the end of June.
The group talks of €9.3bn in liquidity. Davy analyst Stephen Furlong reckons the company is burning through about €750m a month and has access to enough cash to cover it for another 12 to 16 months. It is more squeezed than Ryanair but not as squeezed as easyJet.
But IAG needs trippers and business travellers to start booking summer flights in the first quarter. If the cash doesn’t start coming, it has to find other sources of readies. Cathay Pacific, which was bailed out by the Hong Kong government in June, has this week announced it is cutting a quarter of the workforce and the immediate closure of its regional flag carrier, Cathay Dragon. Unbundling the bundle that is IAG would be more complex and take time. In extremis, a further call on the debt or equity markets could be accompanied by part-nationalisation.
Like John Denver, whose ditty was used by United Airlines’ commercials in the 1960s and 1970s, IAG still hopes investors will wait for it, and hold it like they’ll never let it go. It is a tough ask when the shares are trading around the lows and no one knows when — if ever — they’ll be back again.
Shaftesbury’s begging bowl
Shafted Shaftesbury. A month ago Shaftesbury pointed to the first stages of a recovery for London’s shopping district, Cat Rutter Pooley writes. On Thursday boss Brian Bickell warned that in its “reasonable worst-case scenario”, there would be no real improvement for the best part of a year. The West End landlord has gone cap in hand to shareholders for £297m.
Hardly a surprise that retail and leisure landlords are in trouble when Hammerson has already completed a 24 for 1 rights issue and Intu has gone under. But with the likes of Soho’s Carnaby Street and Chinatown, Shaftesbury’s freeholds have better addresses. Investors expect an extra level of resilience.
There is only so much stretch in the balance sheet, though, and Shaftesbury is not alone in deciding it cannot afford to underestimate the persistence of pandemic-induced disruption. Rolls-Royce is raising cash for similar reasons. At 400p and a 55 per cent discount to last-reported net asset value, Shaftesbury’s placing and open offer is dilutive. That hasn’t deterred Covent Garden owner Capco, which bought a 26 per cent stake in June. It is now putting up £65m. It is the price of an option on a future merger.
Worryingly, the assumptions underlying Shaftesbury’s worst-case scenario look possible. The landlord’s 10-year pre-Covid vacancy rate was 2.9 per cent. By September it was already almost 10 per cent. It could double in the next 15 months, if the worst comes to pass. Portfolio valuations have fallen 17 per cent in a year. They could fall 25 per cent further in the next year. Shaftesbury reckons it could stomach a 34 per cent drop in valuations before its loan to value covenants came under pressure. If Covid-19 effects linger, that could become uncomfortably tight.
Other large landlords have avoided back-foot equity raises, nonetheless. They plan to sell assets instead. And British Land and Land Securities have offices where tenants are still paying rents. Capco has made some timely sales, too.
Shaftesbury is doing the right thing by not flogging assets at rock-bottom prices and asking investors to stump up. Peel Hunt analysts calculate that the 400p issue price for the cash call represents capital values of just £1,000 per square foot — cheap for prime London real estate. Most of the cash raised will be used sensibly to pay down debt and cover cash outflows at a time when rental income is iffy. It is also earmarking £63m for a rainy-day fund. That’s more questionable, at the margin. Shaftesbury says it could be used for investments, if conditions brighten. But earlier this month the UK had its wettest day on record.
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