According to DEGIRO, International Consolidated Airlines Group (IAG) (LSE:IAG) shares were the most commonly held by its British clients, from the start of the year to 26 June 2023.
It was also the most popular with customers in Spain.
Given that two of the five airlines that IAG owns are British Airways and Iberia, I wonder if patriotism is part of the explanation. But loyalty to national carriers is not a sensible basis for making investment decisions. There must be other reasons.
I’ve therefore been looking at IAG’s most recent trading update to try and understand why investors are keen to have the stock in their portfolios.
The numbers
On the landing page of the airline’s investor relations website there are seven financial performance indicators that it considers to be important.
Knowing that they will be judged against these measures, IAG’s directors are unlikely to choose ones that will reflect badly. But they seem pretty sensible to me covering capacity, profitability, cash, and debt.
On 28 July 2023, the company released its results for the first six months of 2023. In the table below, I’ve summarised the airline’s preferred measures for the first half of 2023, the same period in 2022, and all of last year.
| Measure | Year to 31.12.2022 | 6 months to 30.6.22 | 6 months to 30.6.23 |
| Return on capital (%) | 4.5 | 4.6 * | 12.8 |
| Operating margin (%) | 5.3 | (4.8) | 9.3 |
| Capacity (%) | 78.0 | 77.8 | 84.1 |
| Free cash flow (€m) | 1,667 | 1,265 | 2,256 |
| Adjusted earnings per share (€ cents) | 5.6 | (13.8) | 17.6 |
| Net debt to EBITDA | 3.1 | 3.1 | 1.5 |
| Capital expenditure (€m) | 3,875 | 2,242 | 1,651 |
What does it all mean?
It appears to me that everything is moving in the right direction.
Capacity is increasing and is now at 94% of pre-Covid levels. The airline is clearly bouncing back after the pandemic nearly wiped it out. It made a huge operating loss of €7.45bn in 2020 when revenue fell by 70% compared to the previous year.
In 2022, IAG returned to profitability for the first time since 2019. And this has continued into the first half of 2023.
There’s also good news when it comes to debt.
IAG — like other airlines — has large borrowings. Many companies compare EBITDA (earnings before interest, tax, depreciation, and amortisation) to debt to give an indication as to how much headroom there is when it comes to meeting its repayments of capital and interest.
Again, IAG’s performance against this measure is improving.
Flying high
All this good news probably explains why the stock is so popular with investors.
And their faith has been rewarded. Since the start of the year, it’s up over 28%.
Does this mean I should follow the crowd and buy some IAG stock?
I don’t think so.
Storm clouds
In the short term, I reckon there’s some potential upside but over an extended period I’ve some concerns.
A report from Bain & Company forecasts that demand for long-haul flights to and from Europe — IAG’s principal source of revenue — will fall by 2030.
It cites tougher carbon regulation as the main reason. The industry is said to account for 3% of the world’s CO2 emissions, which makes it an obvious target for increased taxation. In an attempt to maintain its margin, IAG will have to increase prices, which I’m sure will reduce passenger numbers.
Also, the company last paid a dividend in December 2019. For understandable reasons, it’s had to preserve its cash since then. With its return to profitability, shareholders might not have to wait too much longer before its reinstated. But in the absence of a dividend, I think there are better long-term opportunities elsewhere.
