Sentiment can change very quickly in the stock market. Late last summer, the International Consolidated Airlines Group (LSE:IAG) share price slid below 100p due to various factors impacting airline stocks. Yet over the past three months, IAG stock has jumped 21% and currently trades at 168p. Here are a couple of reasons why I think the price could head higher still this year.
Easing cost pressures
Last year saw higher costs for the business on different fronts. For example, a weak euro and a strong US dollar didn’t help costs when it came to accounting. Further, jet fuel prices shot higher due to the situation with Russian oil supply.
These problems are starting to fade. Over the past month, jet fuel prices are down 13.2%. The continually easing pressures from the cost side should enable the business to be more profitable. Even if revenue stays flat, lower costs naturally mean a higher profit.
Although there isn’t a perfect correlation, if IAG can modestly reduce costs and increase revenue, this could easily filter through to 20% higher profits. If I’m targeting 200p (a 20% uplift from current prices) I don’t feel this price level is unrealistic.
Rebound in business travel
Another avenue that should help the company is higher revenue. In the Q3 update, it noted that “leisure revenue has recovered to pre-pandemic levels”, but business travel is lagging. I feel that will change this year.
We’ve seen China reopen for business recently, along with the rest of Asia Pacific. Revenue for Q3 increased by 0.9% versus Q3 2019, despite “the Asia Pacific network remaining substantially closed”.
Therefore, if revenue grew without this segment of the market, think of the uplift going forward!
Aside from just this area, I’ve been noting a lot more in-person business events being advertised. Even with the short-haul fleet of IAG, business flights within Europe and the UK should see higher demand.
Business travellers are very lucrative for airlines and in some cases account for 75% of passenger profits. So if IAG increases profits from this area, a move to 200p could happen.
Accounting for turbulence
Don’t get me wrong, there are still risks ahead for IAG. The share price is down 3% over the past year.
The carnage of last summer (airport strikes and cancelled flights) could come back this summer. Especially here in the UK, I wouldn’t rule out further strike action.
Another point to note is that the business still has over €11bn in debt. This is a hefty weight on the shoulders of any public company.
These are concerns, but I don’t think this will stop a move back to 200p this year. Sure, if I was claiming the stock could double in value in this timeframe then my claim would be rather hard to prove. But a 20% rise, followed potentially by a similar amount next year, seems very reasonable for a company that’s starting to perform. That’s why I’m thinking about adding the stock to my portfolio now.
