FTSE 100 stock International Airlines Group (LSE: IAG) is one of many airlines to struggle in the face of rising inflation and a pandemic-induced hangover. The company’s share price fell 7% in the last month, following the larger 30% year-to-date drop and the 40% decrease across the last 12 months.
Subsidiary British Airways faced potential strikes last month, further shaking investor confidence. Another problem is the price of jet fuel. This currently averages $146 per barrel in Europe, straining the group’s finances.
This has all pushed many investors to turn away from IAG. With the share price now sat at 107p, let’s take a look at whether this FTSE 100 stock can soar again and whether I should buy it.
Clipped wings
The industry-wide problems of rising costs have certainly shaken IAG. But the airline operator has been grounded by internal issues too.
It was shaken last month as check-in staff at British Airways voted to strike. A strike would have piled on more pain for the business. And it would have been particularly damaging after prolonged staff shortages had already caused major problems, such as flight cancellations. Fortunately for this FTSE 100 stock, a new pay offer was implemented last week. This seems to have averted additional chaos, but it doesn’t bode well for profit margins.
IAG also has an alarming level of debt. In its Q1 report, it reported net debt of £9,812m. It had only managed to reduce the figure by 0.6% during the first quarter. It was a difficult few months. of course. But such high debt, lurking alongside an increasingly pressed bottom line, certainly shakes my confidence in this stock.
Executive confidence
Yet there are positives too. In its Q1 report, CEO Luis Gallego said the company “expects to be profitable from the second quarter onwards“.
The business has successfully navigated through Omicron and other issues and a 7% increase in passenger capacity demonstrates its first step back to full operation. IAG aims to run at 80% of its 2019 capacity by Q2. Also, a huge cut in its operating loss, from £910m to £618m, is good news, even if it’s not yet profitable.
However I remain doubtful that the stock can actually turn an attractive profit. Despite operational improvements, I’m still unsure that Gallego’s confidence is well placed. IAG significantly increased costs this quarter. Supplier expenses rose from £808m to £1,415m.
And employee costs grew to £885m, up 65%. The company attributed this to capacity expansion and rising inflation. Nevertheless, this suggests it may not be able to deal with its mountain of debt any time soon. And with increasingly-strained profit margins, BA’s new pay offer will add another worry onto an extensive list of concerns.
I may not agree with Gallego’s Q2 optimism, but he will have my full attention come the Q2 report, which is due at the end of this month. I don’t think the group is set for a full-on recovery right now so I won’t be buying. However it’s certainly a FTSE 100 stock I’ll be keeping my eye on.
