3 reasons why I think the IAG share price could rally this year

Jon Smith writes about how improving risk sentiment could help the IAG share price this year, but not without risks remaining.

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Over the past year, the International Consolidated Airlines Group (LSE:IAG) share price has fallen by 35%. It struggled last summer, with Omicron still causing problems for the industry in general. I don’t think the company is out of the woods by any means, but I can see several reasons why the IAG share price could move higher over the summer. Here’s why.

Easing commodity price pressures

Two of the reasons why the IAG share price has struggled in 2022 are actually points that I think can be flipped to a positive situation in coming months.

The first one is the war in Ukraine. Ever since the invasion by Russia, commodity prices have jumped higher. Oil is a component of jet fuel, so the high prices above $100 per bbl have meant higher costs for aircraft fleets. Higher prices are good for oil majors, but not for airline operators.

However, I think that measures will be taken over the course of the summer to bring down such high prices. A natural (and much-hope-for) way for this to happen would be for a peaceful resolution to the situation in Ukraine, with a restored, higher output of key commodities such as oil. The higher output should reduce the price. We could also see OPEC increase output from the Middle East, easing pressures.

Positive risk sentiment

The second reason linked to this is that IAG shares have traded sensitively to investor risk sentiment this year. Whenever we see market jitters, the IAG share price usually takes a tumble. Be it inflation concerns, headlines from Ukraine or other worries, it’s clear that investors don’t feel comfortable holding the stock during periods of uncertainty.

I might be wrong in my optimism, but I feel positive risk sentiment could return this summer. First, as mentioned, we could get a resolution to the war in Ukraine. Second, we could start to see that inflation has peaked. Third, we could get some action from the Government helping to ease the cost of living squeeze. In any of these cases, I’d expect the IAG share price to jump as people get back confidence in growth stocks.

Company-specific benefits for the IAG share price

The final reason for a potential bounce is due to specific news relating to IAG. For example, we got confirmation last week regarding the purchase of 50 737 aircrafts. These are geared for the short-haul market, as part of a refresh of some older planes.

Q1 results released earlier in May also showed green shoots. Passenger capacity continues to move higher, now at 65% of 2019 levels. Cash was also boosted to €8.2bn, up from €241m from the end of last year. This was due to increased booking revenues.

Therefore, if we get strong Q2 results and other headlines coming out this summer then I think the IAG share price could outperform. The main risk I see to my view is if my first two reasons don’t materialise. If the economic situation in the UK worsens due to higher prices, then I struggle to see how a big move higher for the shares could happen. As a result, I’m happy to invest a small amount now and then will keep some cash allocated to invest in coming months.

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 assessed. Consider taking independent financial advice.

Jon Smith and The Motley Fool UK have 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.

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