On 10 April, I invested £2,000 in International Consolidated Airlines Group (LSE: IAG) shares. I’d have invested more, but that’s all the spare cash I had sitting in my SIPP.
Last year, IAG as it’s also called, was the FTSE 100’s top performer, roughly doubling in value. But when Donald Trump’s Liberation Day tariffs landed on 2 April, the shares took a beating.
What made IAG a winner in 2024 was its heavy exposure to transatlantic business travel via subsidiary British Airways. Suddenly, that was viewed as a risk.
Plenty had been banking on a travel rebound, especially on the business side, as the US economy picked up pace. International Consolidated Airlines Group’s share price took a dive. And I swooped.
Buying the dip
I’ve long followed The Motley Fool philosophy of using market dips to buy quality companies at a cut price, with the aim of holding for years and years.
I felt International the group could be quick to recover once trade tensions cooled. When that happens is anyone’s guess but I wanted to be in before any recovery starts, rather after.
Markets have regained their nerve, with markets now recouping their Liberation Day losses. Over the past month, International Consolidated Airlines Group is up 18%. Over 12 months, it’s up 54%. Further volatility is inevitable, but I’m not worried. I still think I’ve bagged a bargain.
Yet the shares still trade at just 5.95 times forecast earnings, far below the FTSE 100 average of around 15. I’m not expecting that gap to close overnight. Airlines have traded cheaply for years due to the risks involved.
Plenty of moving parts
From recessions and trade wars to volcanic ash clouds and strikes, airlines are exposed to shocks other sectors can dodge. High fixed costs only add to the risk. If passengers stop flying, the bills still roll in.
The trade spat is a real threat. On 25 April, Deutsche Bank analysts said the outlook for transatlantic airlines had worsened and trimmed IAG’s 2025 and 2026 profit forecasts by 13% and 10%, respectively.
Others are more upbeat. Analysts tracking the stock produce a median 12-month share price forecast of just under 380p. That’s almost 33% above where the shares trade today.
While many of those estimates pre-date the tariff threat, I’m still encouraged. Of 27 analysts giving stock ratings, 17 call it a Strong Buy, three say Buy, and six say Hold. Just one says Sell.
Cash flow and confidence
Latest numbers, released on 4 February, were strong. Fourth-quarter revenue rose 11.4% to €8bn, beating forecasts. Free cash flow climbed from €2.2bn to €3.6bn. Net debt has been a big issue for the group since the pandemic, but it was cut by another €1.7bn to €7.5bn.
Management feels confident. They’ve announced a €1bn share buyback and reinstated dividends after a four-year break. The prospective yield is now around 3%.
There are plenty of risks ahead. Fuel costs could spike again. Climate concerns haven’t disappeared. International Consolidated Airlines Group is investing heavily in fleet and tech, and will need to show a return on that money. A global recession would be a huge blow.
I think the International Consolidated Airlines Group share price will fly, but there are storms to navigate.
