IAG share price set to soar on rebounding travel

The IAG share price is expected to get a lift after the airline reports first-quarter earnings this week as more passengers return to the skies amid easing travel restrictions. With the company’s fourth-quarter report showing a trend of losses declining, investors will be looking to see if this continued in the first three months of 2022.

With international travel beginning to show signs of a recovery, British Airways owner International Consolidated Airlines Group [IAG.L] is expected to report a substantial hike in first-quarter revenue on 6 May.

Heathrow airport, a key hub for British Airways, recently revealed it had welcomed 9.7 million passengers — in line with its forecasts — in the first quarter of the year, up from just 1.7 million this time last year. The airport said that January and February had been much weaker than expected due to Omicron-related travel restrictions, but that March demand had increased after the “unexpectedly quick removal” of all UK travel restrictions on 18 March.

Luis Gallego, CEO of IAG, had said that he was confident a full recovery was underway, during its full-year results announcement in February. As travel restrictions are lifted, Gallego noted that bookings had remained strong for Easter and the summer period. “We expect a robust summer with IAG returning to around 85% of its 2019 capacity for the full year.”

However, the company also said that it expects a significant quarterly operating loss due to normal seasonality, the impact of Omicron on near-term bookings and increased operating costs from rebuilding capacity.

IAG shares dragged down amid rising fuel costs

Since reaching a 52-week low of 109.42p during intraday trading on 7 March, the IAG share price has recovered 36% to close at 149p on 3 May. The stock had been swept up in fears stemming from the Russia-Ukraine crisis, which was expected to dampen investor sentiment around foreign travel to Europe.

“We know anecdotally that a lot of north Americans are put off coming to Europe because of the war in Ukraine. They think that London is under attack. So, the UK, as the biggest inbound source for US visitors, will be more affected than any other market in Europe,” John Holland-Kaye, CEO of Heathrow Airport, told the Independent.

Another headwind from the war is soaring fuel prices, given the economic sanctions on Russia – one of the world’s biggest oil producers. Broker Peel Hunt says IAG has hedged most of its fuel supply, given that prices were already rising before the invasion, in advance, but that its hedging was “below that of its peers, hence its fuel bill could be much higher”.

Covid-19, despite the re-opening of society, is still having an impact on airlines, mainly through staff and pilot illnesses. This has led to a number of flight cancellations during the crucial Easter break, which could impact IAG’s second-quarter results. Another worry is whether the rising cost of living may deter hard-pressed travellers from holidaying abroad this summer.

Long-haul travel on the path to recovery

Looking at the airline’s previous quarter, the company had been showing signs of a recovery to pre-pandemic levels. In the fourth quarter, IAG had reported a loss of €278m, down from €1.4bn in 2020. For the full year, it made an operating loss of €2.8bn compared to a €7.5bn loss in 2020.

Passenger revenue for the quarter was €2.7bn, up from €684m in the same period in 2020. Full-year passenger revenue came in at €5.8bn, up 5.9% from 2020.

“Prior to Omicron, long-haul traffic had seen the highest booking activity in October and November at over 80% of 2019 levels,” Gallego said in a statement alongside the results. “This was driven by the reopening of the North Atlantic corridor and the strength of long-haul leisure markets and travellers visiting families and friends. Demand slowed down for very near-term trips following the emergence of Omicron in late November.”

IAG expected to post profits in Q2

The IAG share price has risen 4.5% since the start of the year (through 3 May) and analysts expect it to continue. According to MarketScreener, analysts have a consensus ‘outperform’ rating on the IAG stock, with Barclays posting a 205p price target, representing a 37.5% rise from its 3 May close.

“Profits had been expected to make an arrival in the second quarter, and hopefully that’s still the case. The summer months are crucial for airlines, and that’s especially the case for IAG, which has been especially punished by the pandemic thanks to its long-haul focus” - Hargreaves Lansdown's Sophie Lund-Yates

Meanwhile, Deutsche Bank has a 155p target and a ‘hold’ rating. As reported by the Fly, Deutsche analyst Jaime Rowbotham does not expect that airlines will be able to pass on fuel cost rises to customers “particularly next year when pent-up demand for travel post-Covid eases”.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, is also cautious. “Profits had been expected to make an arrival in the second quarter, and hopefully that’s still the case. The summer months are crucial for airlines, and that’s especially the case for IAG, which has been especially punished by the pandemic thanks to its long-haul focus.”