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Investing in airlines is not for the faint hearted. They often see dramatic changes in profitability, as many key factors like fuel costs and passenger willingness to travel are largely out of their control. Carry British Airwaysfather International Consolidated Airlines Group (LSE: IAG) as an example. IAG’s share price is up around 70% in just over three months. That’s a quick altitude gain.
Could the rise continue and mean the shares would hit £2 each?
positive feelings
The airlines are back in business and in a big way.
After a very challenging few years, most international travel restrictions have been lifted or eased. There is a huge pent-up demand for leisure travel. Business travel has recovered, albeit more strongly in some markets than others.
IAG share price is up 24% so far in 2023, magician has risen 39% and Jet2 has seen its share grow by 28%. But in a period of one year, Wizz and Jet2 have seen their share price drop 46% and 15% respectively. It’s the same story at IAG. Even after the recent rise, IAG shares are 10% cheaper than they were a year ago.
I think the strong performance over the past few weeks reflects growing investor confidence that air travel is back in a big way. But the longer-term picture points to the ongoing structural problems of operating an airline consistently and profitably.
back to black
A look at IAG’s accounts illustrates this. Although it is now back in the black, the last two full years posted after-tax losses of €9.9bn.
Even when things were going well, they were rarely spectacular. In 2019, for example, the company made a profit after tax of 1.7 billion euros. But with revenue of 25.5 billion euros, that equated to a net profit margin of less than 7%.
stock moaning
Many industries have a profit margin less than that, but few suffer the occasional massive costs of an unforeseen event outside of the company’s control. The pandemic is just the latest in a series of costly and unpredictable disruptions to aviation demand. From terrorist attacks to volcanic eruptions, this remains a significant risk for IAG and its peers.
That long-term pattern of sudden and costly surprises helps explain why IAG ended September with net debt of 11 billion euros. At a time when interest rates are rising, that threatens to seriously hurt profitability.
Revenues have exceeded pre-pandemic levels and the company is back in profit. But risks remain and the underlying economics of IAG’s business combined with its balance sheet make it unattractive to me as an investor.
Is there £2 in sight?
So what does that mean for where IAG’s share price could go from now on?
After its recent strong performance, I think a lot of investor optimism has already been priced in.
The company has a market capitalization of £8 billion. Even after its rise, the share price would have to rise another quarter to reach £2.
Absent very strong business performance, I don’t see any immediate drivers for it. It could still happen just as investor enthusiasm continues to strengthen. After all, IAG shares were over £2 in 2021 even as the company’s financial performance was dire. But stocks can also go backwards.
I am still not convinced that IAG can be consistently profitable in the future. I have no plans to add the shares to my portfolio.
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