The airline sector was decimated by the pandemic. Passenger footfall fell to zero virtually overnight, and airlines were forced to take on millions in debt to stay afloat.
Fast-forward to 2023 and IAG (LSE:IAG) shares are yet to deliver a turnaround. Currently sitting at 155p, the shares are miles off their pre-pandemic highs of 400p+. On December 14, 2018 they were trading at 421.66p
Even though the shares are relatively weak compared to pre-pandemic prices, I can’t help noticing that they’ve risen 20% year to date. This seems to signal a newfound momentum for the airline. So, is now the time to be buying for growth in 2024? Let’s take a look.
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Serious headwinds
I see multiple red flags for IAG, mostly due to sustained tough economic conditions. High interest rates across the continent are being used against the inflation that hikes up airlines’ costs for fuel, labour, and maintenance. Although inflation is starting to fall in the UK, I expect there to be a lag effect for IAG that could continue to impinge on its growth.
High inflation has also fuelled the cost-of-living crisis, which has no doubt reduced customer demand for non-essential items like holidays.
On the oil front, prices are escalating due to Saudi Arabia and Russia extending production cuts, reducing global oil supply. This spike hits airlines hard, considering they burn massive amounts of fuel per hour for flights.
Adding to IAG’s troubles, the pandemic pushed the airline into hefty debt. At present, IAG has over £15bn of debt on its balance sheet, which is over double it’s market capitalisation. This debt load, coupled with persistently high UK interest rates, does concern me.
Furthermore, IAG’s share count has more than doubled in the past five years, meaning the company now needs to generate over twice the profit to maintain the same earnings per share (EPS) as it did before. EPS is a key metric monitored by investors, and any factor contributing to a potential EPS drop is a big red flag in my eyes.
Light at the end of the tunnel
One thing that draws me to IAG shares is their attractively low valuation. Currently trading at a price-to-earnings (P/E) ratio of just 5, this is well below the FTSE 100 average of 14. Also, compared to close competitor Ryanair, which trades at a higher ratio of 12, I see value.
Adding to this, IAG posted promising Q3 results in October. Profits and revenues climbed by 17% and 44%, respectively. These numbers signal a positive trajectory, indicating the company is regaining its footing.
The verdict
IAG shares are no doubt trading at a compelling valuation. Also, the company seems to be regaining its financial strength. That being said, I struggle to overlook the high debt load coupled with a shaky sector outlook. Therefore, while the shares are up year-to-date, I’m not convinced that this trajectory will continue. Therefore, I won’t be buying today.
