The International Consolidated Airlines Group (LSE:IAG) share price has done well lately. Since the end of June, it’s been the best performer on the FTSE 100.
And here’s why I think this rally isn’t over yet.
More air travel
According to the International Air Transport Association, there will be 4 billion more journeys in 2043, than in 2023 — an annual growth rate of 3.8% per annum.
If IAG could match this, it would mean an extra 200m flights sold in 2043.
During the year ended 31 December 2023 (FY23), revenue per flight was €223. If this was the same in FY43, additional annual turnover of €44.6bn (127%) could be generated.
Lower fuel costs
In FY23, fuel, oil and emissions charges accounted for 29.1% of operating costs.
Not surprisingly, the price of jet fuel closely matches that of Brent crude. With a barrel of oil currently (30 September) costing around 20% less than it did a year ago, this should help boost earnings.
Some of this positive impact is offset by the fact that IAG buys a proportion of its fuel needs in advance at a fixed price. However, it doesn’t hedge all of its requirements so there will be some benefit from falling oil prices.
Reduced interest payments
Like most airlines, IAG is carrying a lot of debt. At 30 June 2024, it was €16.1bn.
Some of this attracts interest at a variable rate. With the cost of borrowing starting to fall, this should help reduce interest costs. These were €1.1bn in FY23.
Lower landing fees
Another positive is the Civil Aviation Authority’s decision to reduce the cap on landing fees that can be imposed by Heathrow Airport.
For 2025, the airport can charge a maximum of £23.73 a passenger, a reduction of 6% on previous amounts. A similar ruling has been made for 2026.
British Airways holds 52% of all slots at Heathrow. The reduction in landing fees will have a major impact.
On the flip side
However, it’s not all good news (unless you work for the group). In FY23, employee costs were equal to 20.9% of total operating expenses.
In August 2023, British Airways agreed a 13.1% pay rise (over 18 months) for its 24,000 workers. And in Ireland, a long-running series of strikes by Aer Lingus pilots was ended after a 17.75% increase in pay was agreed.
Further industrial action across the group cannot be ruled out.
Should I buy?
On balance, I feel now could be a good time to consider investing in IAG.
But there are risks. The aviation industry is one of the worst for greenhouse gas emissions which could make it vulnerable to additional taxes or penalties.
Also, another pandemic could be more devastating than the previous one.
And although it will shortly be paying a dividend again — the first since December 2019 — it’s not going to get income investors excited.
But there’s no sign of a fall in aviation demand. Even if in-person business meetings are increasingly falling out of fashion, I think people will always want to go on holiday and visit new places. In addition, we’ve seen how some of the group’s principal costs are moving in the right direction.
Therefore, the next time I’m in a position to invest, I’m going to seriously consider taking a stake.
