IAG, or International Consolidated Airlines Group (LSE:IAG), shares are among my best performing UK investment over the past 12 months. It’s up 103% over the year but is now down 12% over the month. The question facing investors now is whether the tide is starting to turn against IAG and its peers in the aviation sector.
Trump’s policies send tremors through the sector
President Trump’s protectionist trade policies and federal cuts have sparked fears of a US recession, sending shockwaves through the airline sector. IAG’s peers in the US have felt the brunt of this uncertainty, but IAG shares have come under pressure as well.
The potential for escalating trade wars and slower economic growth has dampened investor confidence, as airlines are particularly vulnerable to macroeconomic downturns. Compounding these concerns, Delta Air Lines’ revised guidance on 10 March highlighted softening demand, driven by weakening consumer and corporate sentiment.
This double blow of recession fears and declining passenger demand has left the industry on edge, with IAG’s performance reflecting the broader unease. As trade tensions persist and economic indicators falter, the airline sector faces a challenging period, with investors bracing for further turbulence.
Lower fuel prices
However, Trump’s policies, coupled with his “drill baby, drill” mantra, could benefit airlines not heavily reliant on the US market. That’s because the broader impact of lower jet fuel prices offers significant relief from historic highs. Jet fuel, which typically accounts for around 25% of operational costs, has seen a 3.9% decline over the week, 7% over the month, and 11.2% over the past year.
This downward trend in fuel expenses could improve profit margins for international carriers, particularly those with diversified routes and minimal exposure to US trade tensions. Now, IAG’s hedged “a proportion” of its fuel consumption for up to two years, but it still has a degree of exposure — increasing in every quarter — to spot prices.
Forecasts still favourable
Looking forward, IAG’s expected to continue growing earnings with the price-to-earnings (P/E) ratio declining steadily from 5.8 times in 2025 to 5.1 times in 2027. The dividend yield also rises, increasing from 3% in 2025 to 3.8% in 2027, supported by robust free cash flow and a healthier balance sheet.
This upward trajectory underscores IAG’s ability to generate shareholder value as it capitalises on operational efficiencies and recovering travel demand. However, these forecasts remain contingent on macroeconomic stability. A US recession could derail progress by suppressing global travel demand and impacting profitability. While the outlook’s positive, external risks warrant cautious optimism.
Personally, I’m holding on to my IAG shares. I’m up significantly, but I’m waiting to see how the current scenario plays out. It’s a hard market with plenty of pitfalls but significant potential to snap up a bargain. Cash-rich Jet2, with very little US exposure, could be a more attractive opportunity to consider.
