Can the IAG share price recover from its slump?

The IAG share price slumped further despite reporting decent Q1 numbers. With inflation running rampant, can the stock recover with the travel rebound?

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Key Points

  • The IAG share price continues to decline despite reporting decent Q1 results.
  • The numbers look promising as the company expects to achieve profitability in Q2.
  • I am wary of the macroeconomic factors that could result in the company overpromising.

Despite reporting a decent set of results on Friday, IAG (LON: IAG) had its stock further slashed by 5%. As a result, the IAG share price is now down 15% year to date. With that in mind, guidance provided by management could pull the stock out of its slump.

Higher altitude expected

So, why is the IAG share price down then? The group reported an operating loss of €731m. This was much better than the €1.1bn loss it incurred a year ago after all. While this is a 32% improvement, the figure still fell below analysts’ expectations of €548m. Additionally, total passengers also fell below expectations of 15.3m. The group reported a figure of 14.4m instead. Finally, worries of staff absenteeism and IAG having to fork out additional capital to hire workers soured investor sentiment. Therefore, the share price dipped from expectations not being met.

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Transit-ory

Pushing the negatives aside, there were lots of positives to takeaway. IAG is in a transitory period as it gears up towards profitability, and the numbers don’t lie. For one, total revenue before exceptional items was up by a whopping 485% year on year (Y/Y). This beat analysts’ expectations of €3.37bn as the final figure was €3.43bn.

Load factor, a measure of how full a plane is, also saw a monumental increase. The metric jumped to 72%, which was also above consensus of 69%. Nonetheless, this was still 41% down from pre-pandemic levels, as travel to Asia continues to be hampered from Covid restrictions.

Even though the conglomerate’s balance sheet still remains undesirable, it’s worth noting that IAG reduced its debt levels by 0.6%. On top of that, it also improved its liquidity position. Cash and equivalents came in at €8.2bn, a €241m improvement from last quarter.

Sky-high inflation

The main surprise for me was the guidance provided in the trading statement. I was amazed to see that IAG expects its operating results to be profitable from Q2 onwards. In light of the recent guidance provided by many of its other competitors, this could be possible. As such, the airline group may very well be in for a windfall of profits in the short term.

Nevertheless, I am still cautious about the optimistic IAG guidance. This is because, despite industry tailwinds of travel recovering, consumers continue to face a cost of living crisis, with the worst yet to come. The Bank of England recently raised its bank rate to 1% and predicts a contraction in the British economy towards the tail end of the year. Given that the majority of the firm’s customers fly on British Airways, a contraction could lead to a substantial hit to IAG’s customer base.

AirlineBritish AirwaysIberiaAer LingusVuelingLevel
Passenger numbers (‘000s)5,2943,8461,1494,03454
Percentage36.8%26.8%8.0%28.0%0.4%
Source: IAG Q1 2022 Traffic Stats

To conclude, although IAG remains upbeat about its prospects in achieving profitability for the year, I think the path ahead is a cloudy one. I believe inflation will eat into discretionary spending eventually. It’s only a matter of time before the travel industry has to hit the brakes once again. With that being said, I don’t think the IAG share price will recover to its highs of £4.50.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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