The IAG (LSE:IAG) share price has actually performed very well over the past year. It’s up 47% over 12 months, outperforming almost all but a handful of its peers on the FTSE 100. This has largely reflected ongoing demand for air travel, strong results, falling oil prices, and good management decisions.
However, as an investor, I always like to think about possible outcomes to geopolitical events or political decisions, and how this could impact stocks. In fact, with a PhD in development economics, that’s sort of my background.
And, of course, next week, we’re presented with the US election where voters will be pressed with a choice between Vice President Kamala Harris and former president Donald Trump.
In the world of investing, this is being pitched as the ‘Harris Hedge’ — cutting back on invested positions because of Harris’s potentially fiscally restrictive plans — and the ‘Trump Trade’ — investing on the prospect of Trump’s tax cuts.
So, why could this be important for UK-based IAG?
The war in Ukraine
At the time of writing (4 November), Trump is currently the favourite to win the election according to the betting odds. And one of the first things he has promised to do is end the war in Ukraine. Is that’s truly possible at this moment? I’m not sure, but it’s an eventuality worth considering.
What would this mean for IAG?
Well, if we were to see some kind of normalisation of relations with Moscow, it’s possible to assume that Russian airspace would reopen to Western airlines. By virtue of its size, Russian airspace is very important, and its closure in 2022 had a profound impact.
For example, flights between London and Hong Kong are currently 1.5 hours longer, and require substantially more fuel. While this isn’t an IAG route, Finnair‘s Helsinki-Tokyo flights now emit 40% more CO2 due to the extended flight time.
This has led to higher operational costs and has put European airlines at a distinct disadvantage to Asian airlines — like Chinese companies — that still use the airspace.
If Russian airspace, along with Ukrainian and Belarusian airspace, were to become operable again, I’d expect a material benefit for IAG, notably through its long-haul brands like British Airways.
Oil prices
Trump has repeatedly claimed he can significantly lower energy prices by increasing domestic oil production. During his 2024 campaign, he’s promised to “cut energy prices in half within 12 months” of taking office, primarily through increased fracking and drilling.
However, we must note that economists and energy experts note that oil prices are set on a global market, influenced by worldwide supply and demand as well as geopolitical events. In other words, it’s not guaranteed.
Oil prices have a direct impact on jet fuel costs, which typically account for 20% to 25% of airlines’ total operational costs. And that’s why we saw so much volatility in the IAG share price when Israel threatened to hit Iranian oil infrastructure last month.
In short, lower oil price and thus, jet fuel prices, benefit airlines.
Of course, these are just ideas. But ones that seem possible based on election promises.
