3 reasons why the IAG share price could head higher by year end

Jonathan Smith explains several reasons why the IAG share price could head higher into the end of the year, but also notes the risks involved.

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The International Consolidated Airlines Group (LSE:IAG) share price currently sits at 166p. Over a one-year period the stock is up 17.7%. But in my opinion, the real picture is shown over two years. On this timeline, the IAG share price is down 44%, from levels above 400p. The impact of the pandemic has been felt during this period and not in a positive way. However, there are several reasons why I think it could rally over the next few months.

Higher flying hours potential

Firstly, the UK Government has simplified the travel system for those entering the country. Although I think the system is far from perfect, it seems like the authorities have learnt lessons from the initial issues that it presented In recent weeks, key travel routes have opened up again. For example, fully-vaccinated people can now visit France without having to quarantine.

With the percentage of people in the UK that have received both jabs only heading higher, I think this bodes well for international travel. This should also be positive for the IAG share price. Short-haul flights to Europe are a key market during summer and autumn. So continued progress from the Government should aid higher flying hours.

This will likely take time to filter through into Q3/Q4 results. Yet a trading update in between this period showing positive news could be a catalyst for the share price.

Better liquidity seen

Another reason for a potential positive move higher later this year in IAG shares is better liquidity. The Q2 results that were released at the end of July showed good news on this front. It had strong liquidity of €10.2bn going into H2.  This is due to it issuing new bonds and also drawing on facilities from sources such as UK Export Finance.

This meant that IAG recorded cash of €7.7bn at the end of H1, up €1.7bn from the end of last year. This gives me more confidence that the business can survive even if we see a difficult H2. I acknowledge that this can also be flipped to a risk, as ultimately this higher debt pile will make interest repayments a burden. If IAG doesn’t see demand return over the next six to 12 months, the cash will diminish again and further bond issuances might be needed.

Diversification helping the IAG share price

Finally, the diversification around the company could help the IAG share price lift. As noted in the recent results, different airlines serving different markets can help to offset each other. The CEO said regarding Iberia and Vueling that “they were the best performers within the group in the second quarter reflecting stronger Latin American and Spanish domestic markets driven by fewer travel restrictions”.

So even if we see issues in the UK for the likes of British Airways, the IAG share price could still see growth thanks to other airlines within the group. However, this again could be flipped into a risk. British Airways is the jewel in the crown for IAG, and so underperformance here will be a material drag overall. 

I think all three reasons mentioned are valid supports for IAG going forward. However, I’m keen to hold off for a few weeks to see how the summer pans out before investing in the company.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

jonathansmith1 and the The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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