The IAG share price is up 33% in a fortnight! Should I buy now?

The IAG share price has risen by a third in less than two weeks. Charles Archer considers whether to add the stock to his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The IAG share price (LSE: IAG) has had a turbulent couple of years. It hit 684p in January 2020, before falling to 91p over the next nine months. It then more than doubled to 217p by April 2021, as vaccination programs accelerated across the US, UK, and Europe.

But the pandemic’s effect on the FTSE 100 stock lasted longer than many investors thought. By 15 September, it had fallen to 137p. Since then, it’s risen 33% to 183p. What’s going on?

The transatlantic reopening

IAG is the parent company of British Airways, Aer Lingus, and Iberia. Most of its revenue comes from selling tickets on transatlantic routes between Europe and the Americas. And there’s good news on that front. Last week, the US announced that it will be opening up its borders to fully vaccinated travellers by early November. This could send passenger numbers soaring and the IAG share price with it. 

But its possible that the global economy won’t be able to support the same number of flights as there were pre-pandemic. Only 235,000 jobs were created in the US in August compared to a forecast of 720,000. And Europe seems set for high inflation and tax rises. Falling disposable income makes leisure flights to the Americas less affordable.

In addition, the recovery of business flights may take some time. HSBC saved £217m last year by slashing its travel budget in half, with CEO Noel Quinn saying that “we’ve learned to live and operate in a very different way.” And as business class seats generate much higher margins, profitability could be hit hard.

IAG financials

IAG reported an operating loss for Q2 2021 of €967m. This is in addition to a $6.3bn loss during the last three quarters of 2020. And when 37,000 staff come off furlough in a few days’ time, the company says costs will “steeply increase.”

It was also running at just 21.9% of 2019 capacity between April and June. However, it hopes this will rise to 45% between July and September, with capacity increasing to 75% by the end of 2021. This target seems achievable to me as competitor Norwegian has exited transatlantic flights.

IAG is also starting a short-haul business operating out of Gatwick, in order to “be competitive in this environment.” But there’s an incredibly competitive market for short-haul flights already. And I don’t think there’s going to be enough demand for luxury flights that last a couple of hours at most.

My verdict for the IAG share price

IAG currently has €10.3bn in liquidity, due to cost-cutting, fundraising, and pension payment deferral. In fact, CEO Luis Gallego is on record saying that “We do not see the necessity to do a rights issue and are not considering it.” So, unlike competitor easyJet, investor concern that IAG would have to “tap the City for emergency funds” can be laid to rest. At least for now.

But the rising IAG share price isn’t worth the risks for me. While the winter outlook for the coronavirus is looking better, the future is still uncertain. However, if the company can hit the targets it has set by the end of the year, I might reconsider the stock.

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.

Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has 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.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 of the best stocks to buy now with £500

I think that Berkshire Hathaway and Activision Blizzard are two of the best shares to buy today. I think they…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I bought 10 cheap shares. Here’s what happened next

After recent price falls, we bought 10 cheap shares for extra passive income in future. This mini-portfolio offers a tasty…

Read more »

Close up view of Electric Car charging and field background
Investing Articles

Is now a good time to buy Chinese EV stocks as economic growth slows?

Chinese EV stocks tend to trade at a considerable discount to their US counterparts. And that's one reason I like…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

I’d happily start investing in today’s stock market – here’s why

The stock market has been moving up even as the economy has been looking shakier. Would our writer start investing…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 22% in a month! This FTSE 100 takeover target could rise further

A takeover bid for an FTSE 100 firm is big news. Here's what I'm doing about RS Group shares after…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Income shares could help me turn £300 into £500. Here’s how

Our writer believes investing in the right income shares over the long term could be lucrative. Here is his approach.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I bought these FTSE 250 shares for fat dividends!

These two FTSE 250 shares have gained in value since I bought them recently. But I still see these stocks…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Should I buy this REIT to add to the others that pay me juicy dividends?

Jabran Khan looks closer at this real estate investment trust (REIT) and decides if he would add the shares to…

Read more »