Why did the IAG share price lead the FTSE 100 on Thursday?

International Consolidated Airlines (LSE: IAG) has been enjoying a good spell over the past month. And by mid-afternoon Thursday, the IAG share price was leading the FTSE 100 with a 3.5% gain. It was a generally bullish day, but that’s easily ahead of the market.

What’s behind this latest uptick? The British Airways owner is due to deliver Q3 figures on 5 November. And investors are presumably anticipating seeing some flesh on the bones of the ongoing aviation sector recovery. I see a number of other factors working in IAG’s favour too.

For one thing, the UK government has wiped a whole load more destinations from its no-go red list. On top of that, a few more countries are removing the UK from their ‘You’re not coming here’ prohibitions too. There’s a risk that some of these moves could be reversed in the coming months, as winter and influenza hit the northern hemisphere. But it’s a trend that can surely only improve.

Budget airline update

We had an update from easyJet a few days ago. The budget airline turned operating cash flow positive in its fourth quarter, which I think is a milestone. What’s that got to do with IAG? Well, while easyJet still only flew at 58% capacity in Q4, first-half bookings for next year have already doubled. And easyJet expects to get back to 70% of 2019 capacity in Q1.

Curiously, both the EZJ and IAG share prices dropped back a bit on the day, even though I saw the report as upbeat. News of holidaymakers rushing to get their bums back on airline seats has to be good for all the UK’s airlines, I’d have thought. So should I buy before the price climbs?

Long-haul recovery

Short-haul routes are likely to recover quicker than long-haul. So it might be a while longer before IAG benefits from the easing conditions generally. But the transatlantic segment is due to open up in November. And that’s highly profitable for International Consolidated.

What might give the IAG share price a further boost before the end of the year? Heathrow figures for September show passenger numbers getting close to 40% of pre-pandemic volumes. That’s still some way short, but we don’t have any statistics since international restrictions have been eased. October passenger figures should make for interesting reading.

With all this recent positive momentum, I suspect we could see a significant reaction when we get IAG’s November update. If it supports my buoyant feeling for the airline business in general, I can see the shares spiking up again.

IAG share price valuation

But with all this optimism, what’s holding the IAG share price back? I think I have a one-word answer: valuation. I do think the company is well on its way to getting back to full strength. But it’s not there yet. And until it gets there, I don’t think it deserves to be rated at a pre-pandemic valuation.

In short, I’d expect to see a share price discount to cover the risks that the industry clearly still faces. And I’m not seeing it. Taking into account the increase in debt plus the expansion of IAG’s issued share capital, the stock looks to be as fully valued as it was two years ago. So I’ll stay out for now, but I’ll keep watching.