British Airways (BA) owner IAG launched a heavily discounted rights issue on Thursday to raise 2.74 billion euros ($3.2 billion) to help strengthen its pandemic-hit finances, in a first test of faith in its new boss Luis Gallego.

Airline group IAG, which also owns Iberia, said in a statement that its largest shareholder, Qatar Airways Group, which has a 25.1% holding, had undertaken to subscribe for its pro-rata entitlement in the fully underwritten capital increase.

The funds will be used to reduce debt and help IAG withstand a prolonged downturn in travel, the group said, as it also warned that the outlook for the rest of the year and 2021 had worsened since the rights issue was announced in July.

IAG expects its September to December capacity to be 60% lower than 2019’s level, a cut from its previous estimate of a 46% drop, and said in 2021 capacity is expected to fall by 27%, worse than the 24% previously predicted.

This underlines the scale of the challenge facing Gallego, the Spanish insider who took over from long-time boss Willie Walsh this week.

Budget competitor Ryanair slashed its annual passenger target on Wednesday, as most airlines signal capacity cuts due to resurgent COVID-19 infections and as travel restrictions dent recovery hopes.

Under the terms of the fundraising, which was announced in July and approved by shareholders on Tuesday, investors are being offered new shares at a 36% discount and can subscribe to three new shares for every two they own.

IAG, which also owns Vueling and Aer Lingus, said that despite the downgrades it still expected to reach breakeven from operating activities in the last quarter of 2020, and progress was being made with job cuts at BA.

Reuters