Why IAG desperately needs travel restrictions to be lifted, and InterContinental Hotels better placed for holiday comeback

“At the moment the pendulum has swung in favour of economic recovery for the markets and the FTSE 100 has some new-found momentum, briefly trading above 7,100 for the first time since February 2020,” says AJ Bell Investment Director Russ Mould.

“This might lead some investors to begin eyeing the record high of the index close to 7,900 in May 2018.

“The results of the Scottish elections should start to come in over the course of Friday and Saturday with potentially significant implications for the currency markets.

“An outright majority would be seen as a mandate for the SNP to call a second independence referendum – prompting uncertainty and likely hitting the relative value of the pound.

“Across the pond focus is likely to be on the latest US jobs report after shares reached new record highs on Wall Street yesterday.”

International Consolidated Airlines

“These first quarter numbers explain why British Airways owner International Consolidated Airlines, like its peers, is pleading for restrictions on foreign travel to be lifted.

“It is just not viable for an airline to operate at 25% of its previous capacity – it’s like a jet plane running on a single engine. And yet that is just the situation which faces IAG right now – leading to mounting losses and debts for the company.

“Unfortunately for IAG, governments have to judge the situation based on how they can keep the virus under control rather than the requirements of the aviation industry.

“The 17 May, when there looks set to be a partial reopening of outward travel from the UK, is obviously an important date but the moves are likely to fall short of what IAG CEO Luis Gallego and his colleagues are calling for.

“For IAG the question isn’t just about the near-term either – its key UK to US route was heavily reliant on business travel before the pandemic. It is questionable whether this will come back at the same level as it was before Covid.

“Video conferencing has proved an adequate substitute for at least some meetings and companies are increasingly mindful of the costs involved and the environmental footprint.

“At least IAG’s ability to raise fresh funds means it isn’t in any immediate danger of running out of cash.”

InterContinental Hotels

“Is it time for the great big holiday comeback? While the airline industry is dependent on international travel to revive its earnings, hotel operators are in a better place because they should still prosper whether there are restrictions on travel or not.

“Airlines would really be in a pickle if there isn’t more freedom to travel soon. In contrast, a continuation of tough travel restrictions would mean domestic travel activity increases this summer and autumn, and hotel operators like InterContinental Hotels are well placed to capitalise on this trend.

“InterContinental has had to stomach lower room rates as occupancy levels have been weak during the pandemic. Given the difficult times, management probably wouldn’t care if rates don’t recover for a while – it’s all about filling the rooms and its prospects for doing so are picking up.

“At the same time, it is pressing ahead with expansion plans, meaning it is laying flags for future gains at a time when some of its smaller rivals will be struggling to stay afloat.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.