Image source: International Airline Group
British Airways feels a long way from calling itself “the world’s favorite airline” these days. But the parent of the flag bearer International Consolidated Airlines (LSE: IAG) has gained momentum this year. Since the beginning of 2024, the price of IAG has increased significantly 93%.
Indeed, it’s 30% lower now than it was five years ago, before pandemic-era travel restrictions decimated the need for people to fly.
But the price is well above its decline in recent years – it has tripled since September 2022 – and profits have returned.
Despite the rising stock price, IAG trades at a price-to-earnings (P/E) ratio of just 7. That looks low and means the price could go up a lot from here without looking expensive. A rival EasyJet trades at a P/E ratio of 9, for example, though Wizz Air and in 7, as IAG.
Impressive performance
Credit where credit is due.
IAG didn’t rise in value just because investors are rewarming to airline shares, although there is more to it than that. With the demand for leisure travel high and some constraints caused by the lack of flights, this looks like a time when there may be money to run a passenger airline.
IAG has been reaping the rewards of its choice, directness, and strategy.
In its latest quarter, the airline group reported annual revenue growth of 8%. Operating profit grew faster, by 15%, reflecting the financial benefits of the company’s aggressive cost-cutting over the past few years. Profit after tax grew even faster, by 17%. The net profit margin was a healthy 15% and the company felt strongly enough that it had been buying back shares.
As the demand for civil aviation remains high, the company’s business prospects look strong and its valuation does not look excessive.
As one executive noted last month: “Demand remains strong for all our aircraft and we expect a good final quarter of 2024 financially.”
The airline may face challenges of its own
IAG has recently spent money trying to improve the experience it offers at least to its passengers. That would help it play to some of its strengths. They include a well-known brand and a strong position at the world’s largest airport (Heathrow).
But as an investor, I sometimes use what investor Phil Fisher calls ‘scuttlebutt‘. That includes doing some research on the company’s products or services.
I think IAG is investing in improving its passenger experience in part because it has stopped alienating most passengers. If you are competing with airlines that sometimes offer very low fares, that is a threat to IAG’s business model.
My own scuttlebutt – based on recent experience as a rider – makes me feel BA is a bit different from its competitors than it used to be.
Meanwhile, IAG continues to face ongoing risks to the needs of civil aviation. An uncertain economic outlook could hurt leisure demand and business demand (which may still be difficult to return to pre-pandemic levels).
Those risks don’t sit well with my investment approach, so while I think IAG’s share price could go up over the next year, I have no plans to buy the stock.
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