HL View - Oversold9 Nov 2025 13:28
Https://www.hl.co.uk/shares/share-research/iag-q3-results-misses-expectations-guidance-unchanged
IAG’s third-quarter growth came in just shy of market expectations, but the miss was small, making the large share price drop on the day feel a touch overdone. Encouragingly, fourth-quarter bookings are tracking well, and full-year profit forecasts have improved since the half-year mark.
IAG’s market-leading networks, strong brands, and fierce operational focus continue to drive performance skyward. Tariffs had been weighing on the travel sector, given their potential to increase aircraft prices and cause a global economic slowdown. But for now, near-term demand remains strong.
Its largest airline, British Airways, accounts for around 45% of the group’s operating profits. The airline is based in London, where the market is particularly constrained and new flight slots are among the most scarce in the world. Given that British Airways owns such a large proportion of these slots, it has strong pricing power and looks well-positioned to keep benefiting more than its peers from these dynamics.
Due to the high fixed costs associated with flying planes, squeezing more passengers onto each flight is key to increasing profitability. Easing fuel costs has also helped the bottom line. But keep in mind that external shocks could send fuel prices higher again. That risk looks well hedged in the short term, but the group will always be at the mercy of external factors.
Strong operational performance is resulting in healthy free cash flows, strengthening the balance sheet. There’s also plenty of cash left over to hand to shareholders through dividend payments and share buybacks. As always, though, shareholder returns are never guaranteed.
There are some things to keep in mind, though. IAG is investing heavily in the business, with annual capital expenditure set to rise from €3.7bn this year to around €5.0bn by 2028. This includes expanding its fleet, upgrading its digital infrastructure and leveraging data in a bid to improve the customer experience. While we support the strategy, if these investments fail to deliver the required return, sentiment may sour.
With a strong balance sheet, impressive market position, and several growth levers, we think the outlook is positive for IAG.If, as we believe, IAG’s valuation deserves a premium to peers, then we see plenty of upside on offer. But with a strong tilt to premium passengers and the US and Latin American regions, progress will depend heavily on continued strength in these markets, which isn’t guaranteed.
The author holds shares in IAG.
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