The International Airlines Group (LSE: IAG) share price is up over 40% so far in 2021. Over the past year, the British Airways owner’s shares have risen by around 30%.
This improved momentum suggests to me that a lot of bears may have changed their view on the shares. Let’s have a look at the prospects for further rises in the International Airlines Group share price.
Reopening should boost air travel demand
A key driver for the share price recovery seems to have been the expectation that as vaccinations roll out, demand for air travel will recover.
Meanwhile, while passenger demand remains below normal, the cargo business has been a helpful contributor. In the fourth quarter, for example, the company operated 969 flights just for cargo.
But risks remain for the IAG share price. Passenger demand may recover only slowly. Some may never come back at all, as people decide to holiday in their own countries.
Survival could improve industry economics
It’s been a brutal time for the airline industry. From the collapse last year of Flybe to the insolvency of the company’s own Level Europe brand, the airline industry in the UK and overseas has been hard hit by the pandemic.
One upside of that is that once the dust settles and demand returns, it may be easier for legacy airlines than it was before. Less competition could mean more pricing power and higher profit margins. With its strong collection of brands, IAG is well positioned to benefit from any such swing in structural economics for the aviation industry.
That could help the IAG share price. But it could help low-cost competitors like Ryanair even more. Better industry economics don’t necessarily mean better prospects for International Airlines Group.
Cost control could help the IAG share price
For years even before the pandemic, International Airlines Group was a ruthless cost cutter. That has been a useful skill for survival during the past year. From cashing in its art collection to considering selling its headquarters, the company has made moves which are doubtless painful but help its financial position.
A combination of cost cutting and cash raising means the company continues to have strong liquidity. It started this year with €8.1bn of liquidity. That puts it in a strong position even if the aviation recovery takes longer to materialise than many people expect, in my view. It also can help the company’s future profitability.
Even with strong liquidity, speedy demand recovery is needed to stem more losses.
The IAG share price looks cheap for a reason
The company’s best profit from continuing operations in the past few years was in 2018. International Airlines Group earned €2.9bn.
Liquidity raising over the past year has diluted shareholders. With the current share count, €2.9bn would equate to around 58c earnings per share. That’s about 50p, suggesting that even after the IAG share price rise, the shares trade on a prospective price-to-earnings ratio in the low to mid single digits.
That sounds tempting. But that rests on the company restoring its former profit level. Right now that is far from given. A lot of factors remain outside International Airlines Group’s control. That is why I am not planning to buy IAG shares.
Covid-19 is ripping the investment world in two…
Some companies have seen exploding cash-flows, soaring valuations and record results…
…Others are scrimping and suffering.
Entire industries look to be going extinct.
Such world-changing events may only happen once in a lifetime.
And it seems there’s no middle ground.
Financially, you’ll want to learn how to get positioned on the winning side.
That’s why our expert analysts have put together this special report.
If the pandemic has completely changed our lives forever, then they believe that this stock, hidden inside the tech-heavy NASDAQ, could be set for monstrous gains...
christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.