The International Consolidated Airlines Group (LSE:IAG) share price is up 275% over three years. I’m delighted to say I benefitted from most of that rally in IAG as it’s known.
However, I’ve since parted with my IAG shares. And while I do wish I held them a little longer, I believe I’ve isolated a better investment opportunity in the travel sector.
That’s not to say there isn’t a lot to like about IAG. The company now has some of the best margins in the sector, and investors are willing to pay a premium for that.
But I’m looking at Jet2 (LSE:JET2), which is cheaper, and hopefully will be transformed into a more efficient entity in the coming years.
Let’s start by looking at this efficiency equation.
A premium for a margin
IAG is significantly more efficient at turning sales in profits than Jet2, and this helps explain its valuation premium.
Forecasts for 2025 show IAG generating €6,807m in EBITDA from €32,100m in revenue, a margin of roughly 21%, while Jet2 produces £738.9m EBITDA from £7,174m revenue, around 10%.
On net income, IAG is expected to earn €2,732 m, compared with Jet2’s £446.8 m. In other words, IAG needs less than half the revenue to produce similar profits.
This reflects superior scale, cost control, and operational efficiency. But it also reflects the difference in operations between these two companies.
Investors value the predictability and resilience margins provide, particularly in the cyclical airline industry, and that supports a higher share price.
In short, higher margins mean the company keeps more profit per pound of sales, improving cash flow and long-term stability.
Is it worth the valuation premium?
As noted, IAG trades at a clear valuation premium over Jet2, reflecting its higher efficiency and scale.
Forward price-to-earnings (P/E) ratios illustrate this.
For 2025, IAG’s P/E is 6.58 times versus Jet2’s 5.98 times, improving only modestly through 2027 to 6.16 times for IAG and 6 times for Jet2.
Net cash and debt positions further differentiate the two.
IAG is reducing net debt steadily, from €7,517m forecast in 2025 to €3,262m in 2027.
Jet2, by contrast, moves from net cash of £2,018m in 2025 to £2,378m in 2027, a strong position but with more modest growth in scale.
For investors, the question is whether IAG’s premium is justified.
While the company is more efficient and profitable, Jet2 offers greater potential for share price appreication at a lower valuation, with strong free cash flow and a net cash position.
Plus, all net cash-adjusted metrics tell us Jet2 is much cheaper.
Institutional analysts — those from banks and other financial organisations — agree with me… although I don’t always trust their opinions.
Jet2 is currently trading 40% below its average share price target. IAG, on the other hand, is just 5% below its average price target.
For me, it’s an easy choice. Both are worthy of consideration, but I think Jet2 more so.
