On Wednesday, the International Consolidated Airlines Group (LSE: IAG) share price rose after the government gave airlines the news they’ve been waiting for. Double-jabbed passengers will be able to fly into England from the US and most EU countries (except France) without needing to quarantine.
The changes will come into force from 4am on Monday, 2 August. Negative tests will still be needed before departure and on arrival, but this is a big step back to normality for travellers.
Is this a buy signal for British Airways owner IAG? I think it’s good news but, as I’ll explain, I can still see some headwinds.
I expect a big increase in the number of passengers flying between the UK, EU, and US from next week. But I can still see one big headwind — US travel restrictions.
The United States doesn’t currently allow non-US citizens to enter from the UK or any of the Schengen area countries — that’s most of the EU. That means holidays to the US are still off the cards for us Britons. But US citizens will now be able to travel quite easily between the UK and US.
IAG shares are up, but not by much
When markets closed on Wednesday, the IAG share price was up by nearly 8% over two days. This takes the gain seen over the last 12 months to 45%.
Flights between the UK and US have historically been among the most important — and profitable — routes for British Airways. Ramping up these flights should help BA recover. But the US travel restrictions mean demand is still likely to be held back.
There’s also a second problem. IAG has survived the pandemic and City analysts expect a small profit in 2022. But the last 18 months have left behind a mountain of debt — over £12bn in total.
In my view, IAG’s share price is likely to remain under pressure over the next couple of years while debt repayments are prioritised. For this reason, I’d only want to buy the shares at the moment I thought they were seriously cheap. Is that true today?
IAG share price: not a flyer?
The latest broker forecasts suggest IAG’s profits will return to 2019 levels in 2023. Before I decide whether to buy the stock, I want to know if this recovery has already been priced into the shares following this year’s gains.
Unfortunately, my sums suggest IAG’s valuation today is almost exactly the same as it was in December 2019. Back then, airlines were profitable and priced for business as usual. Today, they’re still struggling to recover.
In my view, buying IAG today means paying up for profits that aren’t expected for two more years. I might do this if I was investing in an exciting growth stock. But this isn’t something I’d do with a debt-laden and mature airline.
On balance, I don’t think IAG’s share price look cheap. For this reason, I won’t be buying at current levels.
Roland Head 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.