Can IAG’s share price fly back to pre-Covid highs?

IAG’s share price has flown ever higher this year. Fuelling the gains is pent-up demand for international travel following the pandemic. This has helped the owner of BA and Aer Lingus to narrow losses and reduce debt. Nevertheless, the stock has yet to regain pandemic-era levels. Is this a buying opportunity, or will upcoming industrial action drag on the IAG share price?

• IAG shares are up some 31% year-to-date, but down 77% over the last five years.
• Strong performance in 2023 reflects a return in demand for the industry.
• Operating profits expected to be at the higher end of previous guidance.

International Airlines Group’s [IAG.L] share price has flown high this year, fuelled by a return in travel demand. Yet the stock is still trading well below its pre-pandemic levels, with analysis from Simply Wall Street suggesting the current price is around 65.4% below its fair market value.

But is there upside left in IAG’s share price, and what are the headwinds that should be on investors’ radars?

IAG’s share price flies to recovery

The pandemic grounded IAG’s share price, along with the group’s airlines. The British Airways (BA) owner’s stock closed at 639.8p on 12 February 2020. By the end of the month, it had dropped to 472p, as lockdowns and furloughs hit investor confidence. As the pandemic continued to rage, IAG shares continued to fall, with the stock closing at 91p on 29 September 2020.

Even as lockdown restrictions eased, IAG’s stock has proven volatile. Having lost staff during the pandemic, airports struggled to get them back in place last summer. This led to delays or cancelled flights as the industry struggled with renewed demand. The turbulence was felt in IAG’s share price, which declined over 14% between 1 June 2022 and 31 August 2022.

Since then, things have improved. Year-to-date, IAG’s share price has climbed over 34%, and the hope will be that there are enough clear skies for a continued ascent.

IAG’s share price gains reflect a wider uptick in airline stocks. Ryanair’s [RYA.IR] share price has gained over 35% this year, while EasyJet [EZJ.L] is up over 52%.

What are the headwinds and tailwinds for IAG shares?

A return in travel demand can be seen in IAG’s most recent market update. In the first quarter of 2023, operating profit came in at €9m, up a high-flying €750m from the same quarter last year. British Airways reported its first quarterly profit since the first quarter of 2019. Promisingly, losses after tax shrunk from £787m to £87m

Luis Gallego, CEO of IAG, said that the group’s airlines had recovered capacity close to pre-pandemic levels. For the full year, IAG expects capacity to be 97% of 2019 levels.

Consolidation in the industry could be a tailwind for IAG. One example is Flybe, which collapsed into administration earlier this year. With some smaller players having gone bust, there is now more market for IAG to operate in. IAG has also reached an agreement to buy the 80% of airline Air Europa that it didn’t own, increasing its coverage of Latin America and short-haul flights to Spain.

IAG now expects full-year operating profits before exceptional items to be at the higher end of previous guidance of €1.8bn to €2.3bn.

There are headwinds facing IAG shares. Upcoming BA strikes at Heathrow, its home base, will take place throughout the summer. The disruption could lead to cancelled planes and put a dent in IAG’s bottom line. IAG is also sitting on a substantial debt pile of £8.3bn. The company has managed to chip away at it — it’s down from a previous figure of £10.3bn — but it’s still a substantial amount to owe and could limit shareholder payouts for the time being. The cost of living crisis remains a threat, as customers could prioritise essentials over foreign holidays.

Can IAG shares fly to pre-pandemic levels?

IAG’s share price could continue to fly higher as travel demand returns although a return to pre-pandemic levels may be some way off. In the short term, the stock is still susceptible to knocks from travel disruption caused by strikes or logistical issues.

At the start of May, broker Liberum upped its price target on IAG shares from 240p to 350p, suggesting a 110% upside on Friday’s close, and reiterated its ‘buy’ rating. Analysts tracking IAG shares have a 12-month median target of 196.2p. This would see the stock fly to a more modest 18.2% gain based on Friday’s closing price.