After 5 years of underperformance, could the IAG share price be about to take off?

Stephen Wright wonders whether the IAG share price can overcome high oil prices and staff shortages to make a comeback as travel demand surges this summer.

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Key Points

  • Travel demand is surging after years of pandemic-induced restrictions
  • International Consolidated Airlines faces headwinds from high oil prices and staff shortages
  • InterContinental Hotels Group does not have to deal with either of these issues

Shares in International Consolidated Airlines (LSE:IAG) have had a difficult time over the past five years. As a result, the IAG share price is down just under 70% from its June 2017 levels.

There are some obvious reasons why the stock has performed so poorly. Chief among them is demand for flights being dampened by pandemic travel restrictions.

Bookings for 2022 are looking up, though. So could the IAG share price be about to take off?

Headwinds

I have my doubts. I think that IAG has two new problems to contend with, which I believe will keep its share price down.

The first is the high price of oil. Fuel is one of IAG’s major costs and higher oil prices mean that it has to spend more on fuel, weighing on its profits.

Oil prices have almost tripled in the last five years. If they remain high – as many believe they will – then IAG will be stuck with expensive fuel costs for some time.

IAG’s other major problem is staffing. Having released several staff during the pandemic, it’s now struggling to find enough people to meet the pent-up demand.

As a result, the airline is cancelling large numbers of flights. This is a big problem, since it prevents the business from taking full advantage of the returning demand for travel.

Strong demand and limited supply might allow IAG to charge higher prices for its seats. But the airline industry is notoriously competitive, which makes me think that this is unlikely.

Overall, I think that the IAG share price is likely to remain grounded, despite strong demand for flights this summer.

Better opportunities

While I doubt that the IAG share prices is about to take off, I do think that there is a way for me to profit from the surge in tourism.

The stock that I’m looking at here is InterContinental Hotels Group (LSE:IHG). I believe that the hotel chain stands to benefit from high demand for travel in a way that IAG does not.

InterContinental does not have IAG’s operational costs. Instead, hotel owners pay IHG to be a part of its network and use its branding.

As a result, IHG is unlikely to be affected by the high price of oil. Higher electricity prices might be an issue for individual franchise owners, but they’re unlikely to be a problem for the chain.

The same is true of staffing shortages. Finding people to run the hotels to keep up with demand is the job of the franchisees, not IHG.

I therefore prefer InterContinental Hotels to International Consolidated Airlines as an investment to benefit from surging travel demand. The structure of the hotel company’s business should allow it to sidestep the problems IAG will face.

From an investment perspective, IHG’s stock is much more expensive. But given the headwinds facing International Consolidated Airlines, I’m much happier owning the hotel chain at the moment.

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.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended InterContinental Hotels Group. 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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