Key Points
- IAG shares collapsed in 2020 after the pandemic decimated the travel industry.
- The reopening of the North Atlantic corridor could result in the complete recovery of passenger volumes by mid 2022.
- Rising inflation could pose a major threat to the recovery of IAG shares.
It’s been a rough couple of years for International Consolidated Airlines (LSE:IAG) shares. In 2020, the pandemic decimated the travel industry, which has limped on ever since. But now that the adverse effects of Covid-19 are starting to weaken is now an excellent time to add IAG shares to my portfolio? Let’s take a closer look.
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The bull case for IAG shares
As a quick reminder, this business is the parent company of several prominent airlines, including British Airways, Aer Lingus, and Iberia. The business model is pretty straightforward, provide international transportation for travellers and charge a fare for doing so.
Needless to say, since the pandemic resulted in many popular holiday destinations being cut off due to travel restrictions, IAG shares haven’t exactly performed all too well. However, management recently released its latest set of results which had some encouraging signs of recovery.
In 2021, the average passenger capacity came in at only 36.1% of pre-pandemic levels. That’s obviously still very low. However, upon a closer inspection, a promising upward trend emerges. At the start of the year, this figure was a measly 19.6%. But by the end of 2021, that figure had climbed to over 58%. And for a short period, before the omicron variant entered the picture, it had reached as high as 80% for long-haul flights.
Since IAG makes the bulk of its cash flows from transatlantic flights, the reopening of the North Atlantic corridor is also a great sign of recovery. And consequently, management expects its transatlantic flight capacity to completely recover by this summer.
This is obviously good news for IAG shares. And looking at the firm’s guidance, the days of massive losses and rising debt may soon be coming to an end. Why? Because the group is predicting its return to profitability by the second quarter of 2022.
Assuming this target is hit, it could spark a renewed sense of confidence from shareholders, potentially making the stock take off.
What could go wrong
Like all stocks, IAG shares still have plenty of threats to contend with. Personally, I think management might be getting a bit ahead of themselves with their target milestones for 2022. But even if the firm meets these ambitious goals, I have some concerns regarding the impact of inflation.
The cost of living for UK households is scheduled to skyrocket in the coming months, with inflation pushing up food prices and energy prices set to go through the roof. What does this have to do with airliners? Directly, nothing. Indirectly, it could be a massive problem.
As most household budgets are undoubtedly about to get squeezed, the company may struggle to attract holiday goers. After all, when people start saving money, luxury holiday trips are usually one of the first items on the chopping block.
The group could try to offset this risk by offering promotions to ticket prices. However, with the company already under significant financial pressure, any discounts won’t exactly help restore margins. And that could make IAG miss its 2022 Q2 profitability target, sending shares down even further in the process.
Should I buy IAG shares today?
All things considered, I think IAG shares have the potential to deliver some impressive recovery returns in 2022. But there’s also a significant possibility of the complete opposite happening. Personally, I believe there are far better buying opportunities for my portfolio out there at the moment. So, I’ll be keeping this business on my watchlist for now.
Learn more about IAG
- Here’s what could happen to the IAG share price in 2022
- Can easing travel restrictions boost the IAG share price?
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.