The International Consolidated Airlines Group (LSE: IAG) share price is only up fractionally on a 12-month basis. But the FTSE 100 share’s shot up since mid-December on hopes that the global travel industry could be poised to rebound.
The Omicron variant has proved less severe than many first feared. And this has led to travel restrictions being eased in many regions, prompting a wave of traveller bookings. Fellow travel firm TUI said last week that strong demand since the start of 2022 has pushed summer holiday bookings 19% above pre-pandemic levels.
Can this FTSE 100 share keep rising?
Can airlines and holiday operators expect this demand surge to continue as inflation destroys consumer confidence? Fortunately IAG, through its Vueling and Aer Lingus brands, has exposure to the low-cost travel segment. Sales here could thrive as holidaymakers and business travellers switch down from more expensive operators.
Unfortunately IAG’s other brands like British Airways and Iberia could directly suffer if budget airlines snap up their customers. This is particular worrying as fuel prices increase for airlines, a problem that Air France-KLM chief Fahmi Mahjoub said would likely result in higher ticket prices. Increasing passenger duty on long-haul flights in the UK, on top of hikes to passenger charges at Heathrow, also pose a threat to the recovering travel industry.
I’m also concerned by the huge amount of net debt that IAG has on its books (€12.4bn worth of it as of September). This may significantly cap the company’s long-term growth ambitions. It also threatens to squeeze the level of dividends at IAG when it eventually resumes paying them out to shareholders.
Is BP’s share price too cheap to miss?
Would the cheap BP (LSE: BP) share price be a better option for me today? At the current price of 397p, the oil major trades on a forward P/E ratio of just 6.9 times. It also carries a 3.9% dividend yield, which beats the 3.5% FTSE 100 average.
Fans of BP will argue that oil prices look set to keep rising sharply. Brent crude just hit seven-year highs around $96.50 per barrel and commentators are tipping oil prices to keep rising as supply shortages continue. Ukraine-Russia tensions could push them through the critical $100 barrel before long too.
Long-term risks
But as a long-term investor I’m happy to ignore BP’s low share price. I worry about the company’s future as the world transitions from fossil fuels towards cleaner sources of energy. I’m also concerned about the huge investment BP is finally making in renewables and what these huge bills could mean for shareholder dividends now and in the future.
On top of this, the long-term outlook for oil prices is clouded by the huge investment major producers like Canada, Brazil and Norway are making in their fossil fuel industries. Supply is scarce today but a glut of unwanted oil threatens to weigh on crude prices in the years ahead. So I’m happy to look past BP and also IAG for that matter. I’d rather buy other FTSE 100 shares right now.
