Last year was an excellent one for shareholders in International Consolidated Airlines Group (LSE: IAG). In fact, IAG shares performed better than any other in the FTSE 100.
Yet despite that outstanding performance, the current share price-to-earnings (P/E) ratio is seven. That sounds fairly cheap at first glance.
The general principle is that the lower a P/E ratio, the cheaper the share seems, although in practice that also depends on whether earnings are likely to stay at the same level and also how much debt the company is carrying.
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So, with that sort of P/E ratio and strong commercial performance, could IAG shares move higher in 2025 – and ought I to consider adding the airline owner to my portfolio?
2025 could be a great year commercially
Looking to the year ahead, I think things could go well for IAG. Civil aviation demand is high and it could stay that way into the summer. At the third-quarter point last year, IAG said it expected its strong performance to continue for the rest of 2024.
It did not get into detail about the 2025 outlook at that point, but did say that, “Longer term we see positive, sustainable demand for travel”. I do not really know what that means: is “positive” a synonym for growing, or not? But while the language is not helpful, the mood seems to be one of optimism.
Set against that, however, I also see some risks this year. Multiple large economies are either performing weakly or have recently been in a recession. More may follow.
That, combined with constrained consumer spending, could mean weaker demand for leisure travel. On top of that, business travel demand continues to be weak compared to before the pandemic.
IAG’s strategic choices are a concern for me
On top of those broader risks, I feel IAG has long been making some strategic choices that could also hurt demand at some of its airlines, such as British Airways.
It has been trying to improve aspects of the passenger experience. But after years of cost cutting ate into passenger loyalty, I think IAG has lost the power of some of its brands – perhaps forever.
On top of that, recent changes announced to BA’s loyalty programme seem to have gone down like a lead balloon with a lot of frequent flyers. That could hurt demand further.
Here’s why I’m not investing
On top of more foreseeable external demand risks like a weak economy, I am also concerned about ones that are less easy to spot. For example, another pandemic or terrorist attack could badly hurt civil aviation demand overnight.
That puts me off investing in airlines generally. I have made exceptions before (including owning IAG shares).
But while I see further space for IAG shares to move up in value in coming months, the risks here do not sit comfortably with me. So I have no plans to invest.
