International Consolidated Airlines Group or IAG (LSE:IAG) shares have continued to deliver strong returns to investors. Over the past six months, the airline group’s share price has climbed by roughly 23%, reflecting continued recovery in passenger demand and improving profitability, as well as favourable fuel prices.
As a result, £10,000 invested in IAG shares six months ago would now be worth around £12,300, before any dividends. That’s a solid return for a stock that had already surged in the previous year or two.
However, as with many turnaround stories, the easy gains may now be behind it. The key question is whether IAG still offers value — or whether the recent rally has already priced in much of the good news.
A whole new value proposition
A few years ago, IAG shares were trading close to 100p per share. Now they’re over 400p.
The shares were trading at trough valuations, reflecting lingering concerns around fuel costs, balance-sheet leverage, and the sustainability of post-pandemic travel demand. At that point, the recovery was real, but confidence remained fragile.
Today, the picture is clearer. Revenues have climbed from €23bn in 2022 to over €33bn on a trailing basis, while normalised earnings per share are forecast to rise from €0.7 in 2024 to a projected €0.73 by 2026.
Even so, the shares still trade at around seven times forward earnings, which looks reasonable given expected earnings per share growth of more than 23% in 2025 and high-single-digit growth thereafter. The price-to-earnings-to-growth (PEG) ratio remains well below one, suggesting the market has not fully priced in earnings growth.
That said, IAG is no longer a bargain-basement recovery stock. Risks remain, including fuel price volatility, geopolitical disruption, and any slowdown in discretionary travel demand. After all, this is a very cyclical sector traditionally.
That’s the problem when valuing airlines. Sometimes you have to remind yourself that growth isn’t linear unless there are structural supporting factors.
An alternative
It might not be listed on the main market (it’s AIM listed), but Jet2 (LSE:JET2) looks best in class to me.
On face value, it looks similar to IAG. It trades at 6.8 times forward earnings. The big difference is in the balance sheet. Jet2 has around £800m in net cash representing 22% of the market cap. Meanwhile IAG is nearly £5bn in net debt, and that’s around 27% of the market cap in the other direction.
If we adjust the price-to-earnings (P/E) ratio for cash/debt, we can see that Jet2 is around five times and IAG is closer to nine times.
There are other factors in Jet2’s favour. It’s currently undergoing a fleet renewal programme, which is being managed very prudently. This should deliver a cost saving of £10 per seat as it replaces its less fuel-efficient aircraft.
In the near term, earnings are unlikely to grow due to a significant move to operate out of Gatwick. But the period from 2027/2028 onwards is highly promising
Risks are similar to that of IAG, include a rise in fuel prices. With lower margins, Jet2 is also more susceptible to further increases in the minimum wage or national insurance contributions, etc.
Both are worth considering, but Jet2 is certainly my favourite.
