Over the past month, the International Consolidated Airlines Group (LSE:IAG) share price is down 23%. Over a longer, one-year period, the IAG share price is down even further, by 35%. This performance isn’t inspiring for a potential investor to look at. However, I think that the fundamental outlook for the airline group is improving. Here’s why.
Positive shoots appearing
Firstly, the 2021 annual report showed me that the business is moving in the right direction. Figures might not be above pre-pandemic levels, but they are improving. In the CEO’s commentary, this was flagged up. For example, when talking about the reopening of the North Atlantic travel corridor, Luis Gallego said that, “It led to transatlantic bookings reaching nearly 100 per cent of 2019 levels. We expect North Atlantic routes to reach full capacity by summer 2022”.
In Q1 2021, the group flew at 19.6% capacity compared to 2019. By Q4, this figure had grown to 58.3%. From this, I think that the business can push on in 2022 to even higher levels of flying hours and seat capacity. Fundamentally, the restrictions relating to Covid-19 are now all but gone in the UK, along with many countries that the fleet flies to.
To this end, the IAG share price has moved higher this week, in part due to restrictions being lifted shortly that means masks won’t be mandatory on planes in certain circumstances. As far as air travel can get back to normal, with limited paperwork and testing requirements, then the natural uplift in bookings should be seen.
Another point that I think is relevant is that the IAG share price is fundamentally mispriced from the enterprise value. The enterprise value is an alternative measure of the worth of a business, and includes the equity and debt capital. Currently, the enterprise value is £17.8bn. Yet with the low share price, the market capitalization is £7.7bn. Over time, I’d expect these two values to move closer together (likely due to the market price moving higher).
Risks for the IAG share price
I can’t avoid the fact that despite the above positivity, the IAG share price has been falling recently. One of the main reasons for this has been the increase in oil prices. This is a component of the fuel needed for the airplanes. Therefore, IAG are going to have a much higher cost base due to fuel being more expensive. Especially at a time when demand for flying is higher, the company is going to be busier but having to use more expensive fuel.
Another concern for some investors is that the situation in Eastern Europe has meant that Covid-19 has got much less coverage. The virus hasn’t simply gone away. In fact, in China,the government has put fresh lockdowns on some provinces this week, such as Shenzhen. I think this makes some people cautious about the potential for international air travel this year.
Overall, I’m thinking about buying IAG shares at the moment to capitalize on what could be an undervalued stock.
