Before the widespread onset of Covid in 2020, the International Consolidated Airlines Group (LSE: IAG) share price was above 600p. But in that year, and for much of 2021, passenger numbers across the key global airline hubs dropped by over 90%.
2022 was not much better, with the UK’s airline sector seeing passenger revenue fall by around £250bn.
February 2022 also saw Russia invade Ukraine, prompting a major spike in energy prices, including of jet fuel. It also prompted a strengthening of the dollar, as investors sought traditional safe-haven assets.
Neither of these factors was supportive of any potential bounce-back in the beleaguered airline sector in which IAG operates.
That is why IAG shares are down 75% from where they were before any of this happened. There was a brief rally earlier this year, before misplaced fears over a potential banking crisis reversed that. Consequently, the IAG share price is down 10%+ this year as well.
Fundamentals look more positive
Yet for me, the backdrop for IAG looks better than it has been at any time before Covid or the Russia-Ukraine war.
For a start, oil prices have come down a long way in the past few months. The price per barrel of the Brent oil benchmark was over $135 just after Russia invaded Ukraine in 2022. Now it is under $80 per barrel.
These lower prices are despite the OPEC+ oil cartel cutting oil production in early April. The US, the biggest oil producer in the world, has also made it clear that it favours lower oil prices.
This means that the price of jet fuel has also fallen. Last year, with an average Brent oil price of $103 per barrel, jet fuel constituted 30% of airlines’ operating costs.
Positively as well, dollar strength has diminished as the risk premium attached to Russia’s Ukraine invasion has fallen. With much of its income in other currencies, IAG’s fuel costs — priced in dollars — have also dropped.
Latest results also positive
These positive factors fed through into IAG’s results, which showed a Q1 profit for the first time since 2019. They showed a profit of €9m against consensus analysts’ expectations of a loss of around €180m.
IAG now sees its full-year profit coming in above the top end of its €1.8bn-€2.3bn projection.
Additional boost from takeovers?
Given the improved backdrop for the aviation sector, there has been talk that IAG may expand its portfolio of businesses.
It already operates British Airways, Aer Lingus, and Vueling, among others. However, low-cost airline easyJet is a name that has been mentioned in connection with IAG in recent weeks.
A takeover would make sense, following IAG’s acquisition of the remaining 80% of low-cost airline Air Europa in February.
But there are three key risks in the IAG share price for me. Oil prices may go up and stay up. The dollar may strengthen and stay strong. And there may be another global pandemic of some sort.
I see IAG as largely an oil price and dollar play, and I have exposure to both through other stocks. If I did not have these, I would buy IAG shares on my strong view that they might well soar.
