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Sentiment can change very quickly in the stock market. At the end of last summer, the International Consolidated Airlines Group (LSE:IAG) share price fell below 100 pence due to various factors affecting airline shares. However, in the last three months, IAG shares have risen 21% and are currently trading at 168 pence. Here are a couple of reasons why I think the price could go even higher this year.
Alleviate cost pressures
Last year there were higher costs to the business on different fronts. For example, a weak euro and a strong US dollar did not help costs when it came to accounting. In addition, jet fuel prices have skyrocketed due to the Russian oil supply situation.
These problems are starting to fade. Over the past month, jet fuel prices fell 13.2%. Continually decreasing pressures from the cost side should allow the business to be more profitable. Even if revenue is flat, lower costs naturally mean higher profit.
Although there is no perfect correlation, if IAG can modestly reduce costs and increase revenue, this could easily trickle down to a 20% increase in profit. If I’m targeting 200p (a 20% increase from current prices), I don’t think this price level is unrealistic.
Upturn in business travel
Another avenue that should help the company is increased revenue. In the third quarter update, he noted that “Leisure income has recovered to pre-pandemic levels”, but business travel is lagging behind. I feel like that will change this year.
We have seen China reopen for business recently, along with the rest of Asia Pacific. Third-quarter revenue increased 0.9% compared to the third quarter of 2019, despite “Asia Pacific network remains substantially closed”.
So if revenue grew without this market segment, think about the improvement that will come in the future!
Outside of this area, I’ve noticed a lot more in-person business events being advertised. Even with IAG’s short-haul fleet, business flights within Europe and the UK should see increased demand.
Business travelers are very lucrative for airlines and in some cases account for 75% of passenger earnings. So if IAG increases profits from this area, it could go to 200p.
Turbulence Accounting
Don’t get me wrong, there are still risks ahead for IAG. The stock price is down 3% in the past year.
The carnage of last summer (airport strikes and canceled flights) could return this summer. Especially here in the UK, I wouldn’t rule out more strikes.
Another point to highlight is that the company still has a debt of more than 11,000 million euros. This is a heavy weight on the shoulders of any public company.
These are concerns, but I don’t think this will stop the return to 200p this year. Sure, if I were claiming that stocks could double in value in this time frame, my claim would be pretty hard to prove. But a 20% increase, potentially followed by a similar amount next year, seems very reasonable for a company just getting started. That’s why I’m thinking of adding the stocks to my portfolio now.
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