It has been a flying start to the year for British Airways parent IAG (LSE: IAG). The IAG share price has risen 30% since the beginning of the month.
That might look like take-off after the shares only gained 7% in the past 12 months combined. So should I buy now?
Aviation tailwinds
The share price lift reflects a number of factors.
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With the last major bastion of widespread pandemic restrictions – China – easing them this month, investor optimism around the outlook for aviation demand globally has increased. A normalising travel environment could help airlines post bigger revenues after a tough few years.
That comes on top of an improving performance at IAG already.
In the first nine months of last year, the company’s revenues more than quadrupled compared to the prior year period. By the third quarter, it had got back to the same level of revenues it had generated prior to the pandemic, even though it was operating at lower capacity. As it adds more flights, capacity ought to grow – meaning that revenues could be set to keep climbing.
It is not just the top line that is exciting investors. The bottom line is also much improved, with the company earning €199m after tax and exceptional items for the first nine months of last year, compared to an equivalent loss of €2bn in the same period a year earlier. Net debt fell by a welcome €0.6bn, although remains a hefty €11bn.
Soaring IAG share price
But those results were published in late October and January has seen no new company-specific news announcements.
So, why have IAG shares jumped so much in the past few weeks?
My own view is that this probably reflects investors starting the year with an increasingly upbeat view about the likely strong demand for passenger aviation. Such demand could help IAG grow revenues further.
I also expect strong progress on profitability, as operations largely return to their pre-pandemic norms, which could help restore former profit margins.
There are headwinds too, though. Fuel costs remain high and inflation continues to threaten profit margins. On top of that, weak economic performance in many markets could dampen passenger demand.
My move
In fact, I feel the IAG share price may have got ahead of itself this month.
The business is looking in better shape than it has done for a while. But it is saddled with a lot of debt at a time of rising interest rates. Profit margins remain thin. The company benefits from owning well-known brands, but my own experiences with BA of late have done little to inspire customer loyalty. That makes me wonder whether in the long term, years of cost-cutting could be detrimental to business health.
Given that, I think a market capitalisation of over £8bn looks high enough for now. I do not see the sort of obvious value here that might make me invest in the company.
