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Years of watching International Consolidated Airlines Group (LSE: IAG) shares have taught me one thing. It’s operating in a volatile sector. All sorts of things can go wrong over which it has no control.
If fuel prices rise, costs soar. If there’s a war, a pandemic, extreme weather, or volcanic ash, then its flights get grounded. Recessions and slowing economies hit demand. US tariffs are another threat. Strikes by air traffic controllers in France or Spain can wreak havoc. Rising airport fees pile on the pressure. And woe betide investors if there’s a pandemic.
IAG took a hammering during Covid, which pushed it to the brink of bankruptcy. Only loading up on debt and a rights issue saved it. The airline raised €2.7bn through a rights issue in 2020 and borrowed an extra €6bn under state-backed schemes. It was a close run thing.
Volatile FTSE 100 stock
Right now, it’s being scorched on two fronts. Middle Eastern airspace is partly closed, and oil prices threaten to double to $200 a barrel. The shares have responded by falling 12% in the last month. That’s a blow to investors, including me. I hold International Consolidated Airlines Group in my SIPP. Until recent days, it was a stellar performer.
Yet a dozen FTSE 100 stocks have done worse. Pharmaceutical firm Hikma, housebuilders Barratt Redrow and Persimmon, Barclays, and consumer names Reckitt and Diageo have all suffered a bigger beating. IAG’s fall is relatively mild.
One explanation could its be low valuation. IAG trades at a price-to-earnings ratio of just six. That’s low enough to tempt bargain hunters. I should point out that its P/E has been subdued for years. Investors appear wary of pushing the stock too high given all those risks I listed, and that caution may be cushioning the share price today.
Record full-year performance
On 27 February, the British Airways owner posted a record full-year operating profit, up 13% to €5bn. Revenue climbed 3.5% to €33.2bn. Operating margins nudged higher, and the company announced plans to return €1.5bn of excess capital within 12 months. International Consolidated Airlines Group has a strong balance sheet and healthy cash flow. That’s probably supporting the share price too.
IAG faces challenges too. Growth slowed in the fourth quarter, while it has to invest heavily to expand its fleet and upgrade digital infrastructure. The US economic slowdown could hit transatlantic travel, in a blow for IAG subsidiary British Airways.
Long-term IAG holders may have taken a knock this month, but the shares are still up 28% over one year and an impressive 152% over three. I’ve done well myself and have no intention of selling. I’m not adding more right now. Middle East uncertainty is too high for my liking, and shares could fall further if the war drags on. But IAG could bounce back strongly if Iran tensions ease, and still looks worth considering with a long-term view.
