If I had invested in airline group IAG (LSE: IAG) a year ago, my investment today would be worth only 3% more than I paid for it. But if I had invested a couple of months ago, I would have seen the value of my shares increase over 40% already.
What is behind this strong performance – and ought I to buy IAG now for my portfolio in the hope of more such returns to come?
Improving business performance
Last month, IAG updated the stock market on its business performance during the third quarter. This update contained various pieces of good news that suggest its performance may have turned a corner.
The company’s operating profit for the quarter was over €1bn. Profit after tax and exceptional items came in at €853m. With liquidity of over €13bn and strong profitability once more, IAG can now begin to consolidate its performance and rebuild financial resilience for the long term.
While net debt remains stubbornly high at over €11bn, at least things are moving in the right direction. It has fallen €609m in the first nine months of the year.
Can this continue?
IAG reported revenue in the third quarter that was actually slightly above the equivalent quarter in 2019, before the pandemic and government travel restrictions battered customer demand.
However, I see room for further growth from here. In the current quarter, seat capacity (adjusted for distance) is expected to be just 13% lower than it was back in 2019. That means there is still room for further demand recovery, on top of which I expect the airline to benefit from ongoing pent-up travel demand.
Inflation could eat into long-term profitability at the company. One risk I see is stubbornly high fuel costs. On the other hand, inflation can cut both ways. Like its rivals, IAG is benefitting from the willingness of many flyers to splash out on travel again. Prices have gone up across much of the travel industry, including many flight tickets, but demand remains high.
My move on IAG shares
I think the recent price surge in IAG shares shows that the market has already noticed the improving business performance at IAG. Still, there is room for more revenue growth and debt repayment. That could help push up IAG shares further.
However, I have no plans to buy the shares for my portfolio. The upswing in results highlights one of the key risks I see in owning airline shares: a large part of their financial performance is outside their control. From fuel prices to travel restrictions, IAG and its peers can see their performance move around strongly due to things over which they have little or no control.
On top of that, although debt is falling, it is still very high. IAG’s balance sheet adds risks for the company, as servicing debt could eat up profits. IAG shares may continue their ascent, but as an investor I will not be fastening my seat belt for take-off.
