Hargreaves Lansdowns current view of IAG27 Feb 2023 11:05
"After an incredibly rocky few years, British Airways owner, IAG has bounced back to profits. Huge efforts have been made to ramp up capacity. And with a return of more normal travel patterns, that means planes are now full enough per-trip that profitability should be sustainable for now.
As a long-haul specialist, the path to recovery has been pretty protracted and painful. But pandemic-related challenges are now a mere vapour trail. It's time to look forwards.
The group's benefitting from two things. One is pent up travel demand, which is a real benefit and current trends show just how important holidays are to IAG's core customers. The second thing to consider is consolidation in the airline industry. A handful of smaller carriers have gone out of business and IAG's acquisition of Air Europa means there's more market for the taking. This doesn't upend the investment case, but it's a helpful market dynamic and shows the benefit of having strong, trusted brands in this business.
There are some things to keep in mind though. While pent up travel demand still has room to run, it can't go on forever. At some point we'll see what normal demand looks like once more. There's a very real risk that consumer behaviour is yet to fully adjust to a world of higher inflation and increased costs. If spending starts to rein in, we could see the strong forward order book come under pressure.
Costs are also a drag, not least because of soaring fuel costs. While this is largely outside the group's control, it has the ability to badly dent the newfound profit pile if demand weakens. With the wider cost increases that come with getting this giant bird of a business back at full height, this means pre-covid levels of operating profit aren't expected for a few years.
Our biggest concern for now is the group's eye-watering debt pile, which cost north of €824m in interest last year. Shareholder payouts will take a backseat to debt management for a long time to come.
For now, it seems the worst is over for IAG and the current risks to demand look more like turbulence than a full stop. We're a lot more positive than we've been for some time. But keep in mind, IAG is likely to face the worst of any slowdown in consumer spending and we can't rule out knocks to the valuation in the short term."
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