Airlines were among the hardest hit industries during the pandemic, as global travel ground to a halt. The IAG (LSE: IAG) share price was hit hard as a consequence and has struggled to bounce back to its pre-Covid highs of over 400p.
However, year-to-date the stock has returned a healthy 18% for investors. Considering this new-found momentum, could the stock be a top FTSE 100 performer in 2024? Let’s take a closer look.
Tough times
I notice several concerning indicators for IAG, most of which stem from the challenging economic conditions at present. Interest rates remain high across Europe, aimed at curbing rampant inflation.
The inflation surge amplifies operational expenses for airlines, denting their earnings. It escalates costs linked to fuel, labour, and maintenance, straining budgets and profitability.
Moreover, surging prices commonly lead to a decline in consumer spending on non-essential items like holidays, potentially lowering customer demand. That being said, in the UK specifically, prices have started to cool down.
High prices may be easing in consumer goods, but for oil, it’s the opposite. The main cause of any uptick stems from the news that Saudi Arabia and Russia have agreed to extend their voluntary cuts in production and exports until the end of 2023. These reductions are anticipated to significantly diminish the worldwide oil supply. As supply wanes, prices rise, which is bad news for airlines like IAG. For context, a commercial airline flight burns upwards of 10,000 litres of fuel an hour.
In addition to this, the pandemic forced IAG to load its balance sheet with debt. In its most recent filings, the airline reportedly had over £15bn debt outstanding. This is double its current market cap of £7.4bn. This stat does worry me, especially given the persistently high interest rates in the UK.
Another significant concern is the substantial increase (over double) in IAG’s share count over the past five years. Consequently, the company now needs to generate more than double the profit to achieve the same earnings per share as it did half a decade ago.
What I like about IAG
One thing that does draw me to IAG shares is their low valuation. Currently trading on a price-to-earnings ratio of just 5, they sit well below the FTSE 100 average of 14. In addition to this, close competitor Ryanair trades on a much higher ratio of 11.
In addition to the low valuation, IAG released some positive Q3 results in October. Profits and revenues increased by 17% and 44%, respectively. This suggests that the company is back on track.
However, for me the positive results and low valuation aren’t enough to tip the scale in favour of investing. I find it hard to overlook the combination of high debt, high rates, and increasing oil prices. For this reason, I struggle to see how IAG shares will take off in 2024, and as such I won’t be investing today.
