The Omicron variant has damaged the prospects of airline stocks. It doesn’t take a genius-level IQ to understand why but the sudden recovery of shares in International Airline Group (LSE: IAG) yesterday definitely calls for an investigation, as the reasons are not apparent on the face of it.
The IAG share price absolutely soared to the tune of 11% yesterday. It was unexpected. So unexpected that billionaire, Ken Griffin, reportedly lost millions shorting the stock. So what did the market know about this stock that a billionaire hedge fund manager didn’t? That is exactly what I will try to break down in this article.
A permanent return to the skies on the horizon?
Generally speaking, airlines got a huge boost yesterday after the World Health Organisation confirmed that the Omicron variant causes milder symptoms. Naturally, investors proceeded to ignore the fact that thousands of flights have been cancelled since Christmas. They then poured into airline stocks and the IAG share price was one of the beneficiaries.
IAG is the parent company of British Airways, Aer Lingus, LEVEL, and Iberia. Needless to say, it has been a very rocky past 24 months for all four providers. Therefore, the news about the mildness of the Omicron variant could not have come at a better time. Earlier this week Eurocontrol confirmed that air traffic in 2021 was at 44% of 2019 levels. The recovery towards the end of 2021 though, seems to indicate that 2022 could be the year that traffic returns to pre-pandemic levels.
This is still a gamble for investors though. No one can say for sure what the future will hold. Eurocentral also confirmed that Irish air travel was the worst affected in Europe last year – which naturally affected Aer Lingus. However, with the likelihood of new mutations lowering with every dose of the Covid-19 vaccines issued, 2022 could well be the year that airlines are back up and running again.
Time to buy?
Would I buy IAG stock right now? The value investing side of me screams “absolutely not” to this question. The reasons are clear. Even in the best of times, IAG (like many airlines) operates on the thinnest of margins. Free cash flows have been in negative territory for more than 10 years and Covid has simply made that much worse. The company’s latest earnings showed a £378m loss. It hasn’t been pretty but there is a bullish case here.
Late last year my colleague Manika Premsingh made the case for buying IAG shares. At the time, the IAG share price had rebounded 16% from 2021 lows to close out the year on a slight positive gain. This was even before any of the current optimism around airline stocks. With the IAG share price as it currently is, there could be some massive upside if 2022 turns out to be the year of the comeback for air travel. I will not be buying this stock right now, but I definitely will be keeping an eye on it.
