IAG (LSE:IAG) shares have surged 112% over the past 12 months. That means a £10,000 investment then would now be worth £21,200. That’s a phenomenal return. This remarkable performance stems from three key drivers: resilient travel demand, strategic fuel cost management, and improved investor sentiment toward undervalued aviation stocks.
Post-pandemic travel surge meets capacity discipline
The airline group, which owns British Airways, Iberia, and Aer Lingus, capitalised on strong post-pandemic demand for travel. This trend has continued well into the 2024 financial year, as consumers prioritised travel experiences over goods. Q3 results show revenue increased by 7.9% year on year and operating profit jumped 15.4%.
Crucially, IAG maintained capacity discipline. In Q3, the business noted modest increases in seating capacity, which appear to be broadly in line with demand. JP Morgan notes the industry’s “benign demand-supply balance” supported pricing power despite economic challenges.
Fuel hedging provides critical ballast
While Brent crude’s 2025 rally to $81/barrel briefly spooked investors, IAG’s fuel hedging strategy mitigated volatility. The company hedged “a proportion” of consumption for up to two years, locking in lower prices. This proved prescient as analysts forecast 2025 fuel costs to trend downward from 2024 levels. Oil prices are expected to stabilise around $70-$75/barrel. JP Morgan estimates this could boost earnings by 15%-20% across European airlines — fuel costs can represent up to 25% of operational costs.
Valuation signal more share price growth
Despite the rally, IAG trades at just 7.4 times forward earnings, marking a notable discount to US-listed peers. And with earnings growth of around 10% expected throughout the medium term, the stock appears to be trading with a price-to-earnings-to-growth (PEG) ratio of less than one. This would suggest that the stock continues to be undervalued as PEG ratio of one is the traditional benchmark for fair value. What’s more, the airline operator is expected to pay a dividend of around 2% in 2025 and 3% in 2026, adding to the notion that this stock is undervalued.
Moreover, bullish investors will point to IAG’s strong cash generation, supporting further debt reduction, and its dominant position in the transatlantic market. New fuel-efficient aircraft could also reduce costs by 10%-15% by 2026.
This has led to continually rising share price targets. While the stock only trades at a 10% discount to the average share price target, Deutsche Bank recently upgraded IAG to Buy, forecasting a 30% rise to their revised €5 price target.
Risks and alternatives
IAG’s business is flying, but that doesn’t mean there aren’t risks. The company remains exposed to shocks in fuel prices. Plus, the longer that Western airlines are banned from flying over Russia, the more likely that competitors will cement their positions within the market. Moreover, a stagnating UK economy, combined with additional National Insurance contributions, may also hurt margins.
Nonetheless, I’m continuing to hold IAG shares in my portfolio. I had considered buying more, but it’s grown to be a large part of my holdings. But I’ve actually bought shares in peer Jet2, which appears to be vastly undervalued.
