The past couple of years have been a struggle for IAG (LSE: IAG) as global travel was entirely shut down. It was particularly severe for IAG compared to some other airline operators as it is heavily involved in transatlantic flights. These were hit even harder than European travel. This forced the company to issue more shares and more debt to survive. But things are starting to look far more promising, and a return to normality may not be too far away. As such, can the IAG share price finally start to soar?
Recent results
In the company’s third-quarter trading update, there were several promising signs. For example, passenger capacity in the quarter was 43.4% of 2019, up from 21.9% in the second quarter. While 43.4% is still underwhelming, it’s clearly a major improvement. Recent market data has also indicated that demand for flights in Britain is edging back to pre-pandemic levels for the summer period. This makes me expect further improvements, a factor that should boost the IAG share price.
Operating losses have also narrowed. For example, in the first nine months of 2021, IAG reported an operating loss of €2.5bn, down from nearly €6bn the year before. This shows the company has been effectively cost-cutting. Hopefully, this will increase its overall profitability post-pandemic.
Other factors
There are further indications that travel is continuing to recover to pre-pandemic levels. For example, in the UK, it’s recently been announced that fully vaccinated travellers no longer require a Covid-19 test on arrival. Further, both Norway and Sweden are allowing all passengers to enter, regardless of their testing or vaccination status. The continuing reopening of tourism around the world will certainly be a benefit for all airlines, including IAG.
Despite this, there are a couple of risks that do not concern the pandemic. For one, the tensions between Russia and Ukraine, could disrupt travel to Eastern Europe. Unlike some other airlines, such as Wizz Air, IAG’s business extends far beyond travel to Eastern Europe, so the impacts should not be too severe. Even so, it is still likely to have ramifications. And if the war we all desperately hope doesn’t happen actually breaks out, I believe the IAG share price will fall heavily as a result.
There is also the issue of the rising oil price, which has hit $90 per barrel recently. This will increase costs, which may force the airline to raise ticket prices or accept lower profit margins. Both these scenarios are certainly not ideal, especially as it attempts to recover from the pandemic.
Is the beaten-down IAG share price ready to fly?
Before the pandemic, the IAG share price stood at over 600p. This compares to its current price of around 160p. Due to issues of share dilution, increased debt, and the large losses the airline has incurred, a return to 600p over the next few years seems extremely unlikely to me. Even so, I believe there is certainly upside potential. This is because the general population seems very keen to go on holiday in 2022. For this reason, I’m adding IAG to my watchlist.
