The International Airlines Group (LSE: IAG) share price is up over 40% so far in 2021. Over the past year, the British Airways owner’s shares have risen by around 30%.
This improved momentum suggests to me that a lot of bears may have changed their view on the shares. Let’s have a look at the prospects for further rises in the International Airlines Group share price.
Reopening should boost air travel demand
A key driver for the share price recovery seems to have been the expectation that as vaccinations roll out, demand for air travel will recover.
Meanwhile, while passenger demand remains below normal, the cargo business has been a helpful contributor. In the fourth quarter, for example, the company operated 969 flights just for cargo.
But risks remain for the IAG share price. Passenger demand may recover only slowly. Some may never come back at all, as people decide to holiday in their own countries.
Survival could improve industry economics
It’s been a brutal time for the airline industry. From the collapse last year of Flybe to the insolvency of the company’s own Level Europe brand, the airline industry in the UK and overseas has been hard hit by the pandemic.
One upside of that is that once the dust settles and demand returns, it may be easier for legacy airlines than it was before. Less competition could mean more pricing power and higher profit margins. With its strong collection of brands, IAG is well positioned to benefit from any such swing in structural economics for the aviation industry.
That could help the IAG share price. But it could help low-cost competitors like Ryanair even more. Better industry economics don’t necessarily mean better prospects for International Airlines Group.
Cost control could help the IAG share price
For years even before the pandemic, International Airlines Group was a ruthless cost cutter. That has been a useful skill for survival during the past year. From cashing in its art collection to considering selling its headquarters, the company has made moves which are doubtless painful but help its financial position.
A combination of cost cutting and cash raising means the company continues to have strong liquidity. It started this year with €8.1bn of liquidity. That puts it in a strong position even if the aviation recovery takes longer to materialise than many people expect, in my view. It also can help the company’s future profitability.
Even with strong liquidity, speedy demand recovery is needed to stem more losses.
The IAG share price looks cheap for a reason
The company’s best profit from continuing operations in the past few years was in 2018. International Airlines Group earned €2.9bn.
Liquidity raising over the past year has diluted shareholders. With the current share count, €2.9bn would equate to around 58c earnings per share. That’s about 50p, suggesting that even after the IAG share price rise, the shares trade on a prospective price-to-earnings ratio in the low to mid single digits.
That sounds tempting. But that rests on the company restoring its former profit level. Right now that is far from given. A lot of factors remain outside International Airlines Group’s control. That is why I am not planning to buy IAG shares.
