The IAG (LSE: IAG) share price has encountered significant turbulence over the past 24 months. But as the global economy starts to reopen, I think there is an increasing likelihood the group could become the prey of a larger target.
This view is based on the analysis of industry insiders, who believe that, coming out of the pandemic, the airline industry will have to consolidate to survive. IAG’s market value also remains around 70% below its pre-pandemic level, which could entice potential buyers.
IAG, which owns British Airways among other brands, is one of the largest airline groups in the world. That puts it out of reach of most competitors.
However, deep-pocketed companies such as Emirates and Etihad, both of which are backed by the United Arab Emirates, could afford the price tag. Such a deal would give these corporations access to IAG’s valuable landing slots at Heathrow and other assets.
Other airlines could also have the financial clout to drive a merger of equals. In the United States, aviation activity has recovered much faster than across Europe and the rest of the world.
This has helped Delta Airlines return to profitability. For the quarter ending September, net income totalled $1.2bn. The company’s market capitalisation at the time of writing is just under $26bn (£19bn). IAG’s market-cap is £8bn.
I think these numbers illustrate that while the British Airways owner is one of the largest airline groups in the world, its size does not make it immune to a takeover.
One of the biggest challenges airlines face is keeping costs under control. The industry is notorious for high costs and fare wars, which can hurt revenue growth and profit margins. One of the easiest ways to reduce costs is through economies of scale. This is the approach IAG has used over the past decade or so. By merging several airlines together, management has been able to slash operating costs and improve overall efficiency.
The same logic could apply to a merger between IAG and a larger peer. The airlines would be able to strip out unnecessary costs and achieve more bargaining power with suppliers.
IAG share price risks
This is just speculation at this stage. There is no guarantee a buyer will emerge, nor have there been any rumours suggesting a deal is around the corner. And there are many reasons why buyers may want to avoid the business. It has a lot of debt and a significant pension scheme.
The British Airways pension scheme is one of the largest in the country, and IAG has to spend tens of millions every year to reduce its deficit. This alone could be enough to put off a potential buyer.
Still, for the reasons outlined above, and considering the stock’s performance over the past two years, I think the chances of a potential buyout are growing. This is just one of the reasons why I would buy the stock for my portfolio today.
Rupert Hargreaves 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.