The last few years have not been kind to airlines. After surviving two years of Covid-related travel disruptions, airlines are now experiencing sky-high fuel prices and inflation-related consumer demand uncertainty. The IAG (LSE:IAG) share price reflects these woes with it plummeting 35% in the last year and 69% in the last five.
Whenever a stock falls this drastically, it is always good to ask if it is completely justified or if there are opportunities at hand.
Expected turbulence
The British Airways owner fell 8% last Friday after reporting a pre-tax £916m loss in Q1. And it has continued to struggle this week. A brief flare-up of the Omicron variant reduced IAG’s passenger numbers and damaged revenue in this period. Despite a loss having been expected for the group, the results still underperformed analysts’ expectations and the IAG share price fell.
Alongside this previous poor performance, investors have a few concerns regarding IAG’s future outlook. It has hedged less than its peers against the price of fuel, which leaves it less protected against rising prices. This could squeeze profit margins for the company, while current staffing shortages look to continue to disrupt future operations.
Alongside this, inflation has raised the cost of living for consumers. People have to prioritise paying energy and food bills so luxuries such as holiday travel could be lower on their must-do lists and IAG’s passenger numbers may fall. Inflation will also increase the operating costs for the company and eat further into margins.
Glimmers of hope?
Despite the cloudy future for IAG, there is some hope that passenger numbers may rebound in the summer of 2022. There seem to be signs of suppressed demand for holidays as travellers hope to enjoy a summer free of major travel restrictions.
IAG has already seen a rise in passenger capacity. In Q1 it was 65% of 2019 capacity, up from 58% in Q4, 2021. There are expectations for this to rise to 80% in Q2, 85% in Q3 and 90% in Q4. However, the IAG share price doesn’t reflect this optimism. And considering the risk of inflation lowering consumer demand, I believe these projections could be a little too optimistic.
What am I doing?
While I recognise the fall in price could be appealing, I believe there are some considerations I should take into account that make this airline stock less attractive. I consider management to have overlooked the risks of inflation when forecasting the rise in passenger numbers and I don’t think the rebound will be as speedy as expected.
Alongside this, IAG has a high €11.6bn debt load. As debt repayments become more expensive, less cash will be available to invest in opportunities that could improve long-term returns. The dividend also doesn’t look to be returning any time soon to sweeten the deal for me.
To me, the risks seem to outweigh the possible benefits from the fall in the IAG share price so I do not think the share price is about to take off. I am resisting adding this airline stock to my portfolio for now.
