The International Consolidated Airlines Group (LSE:IAG) — or IAG — share price is down 7.4% since the beginning of the year. And some of those losses have come since the airline operator announced its earnings for the year to 31 December. While much of it was positive, investors were clearly hoping for a little more.
Earnings
On 29 February, the firm said it had seen a significant surge in annual profit, more than doubling from the previous year. As we’d seen elsewhere, this was driven by rebounding demand, particularly in get-away leisure, post-Covid.
Operating profit before exceptional items for the year ending 31 December reached €3.5bn, up from €1.24bn in 2022 and surpassing the pre-pandemic figure of €3.25bn. Corporate travel however, is returning more slowly, especially in short-haul trips.
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Looking forward, the British Airways owner was relatively upbeat. The company said demand was robust, pointing to Q1 bookings at 92% of 2023 and H1 2024 at 62%, ahead of last year.
IAG, which also owns Aer Lingus and Iberia, acknowledged working on resolving issues at Heathrow Airport, addressing flight delays and baggage losses that have posed challenges for the company.
Since the lifting of Covid travel restrictions, airlines have experienced a sharp spike in demand, resulting in high fares. This, coupled with reduced capacity and the need to rebuild staffing levels after job cuts, has led to significant revenue for airlines.
More growth to come?
Despite an impressive 2023, analysts aren’t expecting profits to kick forward. Earnings per share came in at ¢53.8 in 2023, but for 2024 and 2025 that figure is expected to fall to ¢42 and ¢45. That’s never a good sign.
One reason for this is fuel. Fuel costs account for a significant portion, constituting 25% of IAG’s total expenses. To manage the volatility in fuel prices, the company, like most of its European peers, has employed hedging strategies.
For Q4 of 2023, the company hedged 65% of its fuel requirements, ensuring a stable cost base amidst potential fluctuations in the market. Looking ahead, the hedging percentages for subsequent quarters demonstrate a gradual decrease in hedged volumes: 58% for Q1 2024, 49% for Q2 2024, and 39% for Q3 2024.
This is lower than Ryanair, which is reportedly hedging 65% of fuel at $79 per barrel for business year 2025, but above American firms that don’t traditionally hedge. IAG’s smaller hedge makes it more vulnerable to price shocks.
Worth the risk
When it comes to near-term valuation metrics, IAG looks phenomenally cheap. It trades at 3.1 times earnings for last year, and 3.8 times earnings for the year ahead. It also has a price-to-sales ratio of 0.59 times.
However, the issues comes with growth. Personally, I think the most important metric is the price-to-earnings-to-growth ratio. This is calculated by dividing the forward price-to-earnings ratio (3.8) by the expected annual growth rate for three to five years.
The issue is, we don’t have a growth rate as analysts don’t expect earnings to grow in the coming years. So, while I still hold some shares in IAG, I’m not topping up at the moment. I’m not convinced the stock will rise significantly.
