IAG (LSE: IAG) shares continue to look cheaply priced compared to 2019 levels. And as I like to buy stocks when they’re trading at depressed levels, this has attracted my attention.
However, determining what the future holds for shares in the airline group is quite challenging. There are several potential headwinds and tailwinds that could affect its performance in the months and years ahead.
The outlook for IAG shares
The risks the company faces are apparent. The coronavirus pandemic has decimated the global aviation industry, and it’s unclear if activity in the sector will ever return to 2019 levels. To survive the crisis, IAG had to borrow a lot of money. Net debt stood at €11.5bn at the end of March, an 18.5% increase compared to the same period a year ago.
While the group isn’t in danger of running out of cash anytime soon, with €8bn of liquidity available at the end of March, I’m not particularly eager to invest in companies with high debt levels. If interest rates suddenly increase, IAG could face a crippling interest bill.
Even if air travel does recover, the company will face a challenge to meet demand. It will have to hire new pilots and bring old aircraft back into commission. Neither of these will be cheap.
Returning to the skies
There are some signs that consumers are more than willing to return to the skies. Passenger numbers in the United States have recovered rapidly and are currently just 19% down on 2019 levels. The recovery in Europe has been slower, but peer Tui has reported that consumers are willing to book holidays, and perhaps more importantly, willing to pay more for luxury experiences.
These are some of the tailwinds that could push IAG shares higher. Another tailwind is that some of the firm’s European peers have had to take government cash during the pandemic. In most cases, this has come with conditions, which may hold back their growth and remove competition from the market.
As air travel is a notoriously competitive market, less competition may only be a good thing for IAG’s stable of brands. However, it might not be good news for consumers who may potentially have to pay more.
Putting it all together
I can see both the benefits and drawbacks of investing in IAG shares at current prices. But while I think there’s a good chance the company’s earnings will recover steadily over the next year or so, I’d rather own one of the group’s peers, such as easyJet or Wizz Air.
I think both of these companies have more efficient operations, which will be essential to make the most of the economic recovery. Wizz also has a cash-rich balance sheet, a rare quality for airlines.
