Last year, when the world went into lockdown as the coronavirus pandemic spread globally, it was easy to understand why the IAG (LSE: IAG) share price went into freefall.
Between the beginning of 2020 and October, the stock lost more than 80% of its value, as revenues and profits plunged.
However, over the past six months, the global economy has started to open up again. Consumers are going on holiday, and planes are back in the sky, but the IAG share price remains depressed.
Although it’s increased in value modestly since its 2020 low, the stock is still trading 60% below the level it began 2020. Over the past 12 months, it’s added just 12%.
Lagging behind
IAG has struggled even as its peers have pushed ahead. Shares in easyJet have increased by more than a third over the past 12 months. Meanwhile, Ryanair has returned nearly 40%.
I think there’s one main reason why the IAG share price has performed so poorly compared to its peers. That is the state of the international and long-haul air travel market.
IAG’s British Airways brand virtually dominates in the highly lucrative UK-US transatlantic route. When the group acquired Aer Lingus several years ago, it only increased its dominance in this market.
Unfortunately, as the domestic aviation market in Europe and the US has started to recover, the transatlantic and other long-haul routes are still struggling.
In July, Heathrow, which is usually the busiest airport in Europe and handles most long-haul flights out of the UK, reported passenger numbers were down 90% compared to 2019 levels.
By comparison, easyJet is running around 60% of its pre-pandemic capacity. These figures aren’t wholly comparable, but they illustrate that short-haul travel across Europe has recovered much faster than international travel.
IAG share price troubles
It doesn’t look as if international travel will return any time soon. And I think this is the reason why the IAG share price keeps falling. Without these lucrative routes, the group may continue to lose money. That makes it almost impossible to value the shares and suggests the organisation’s problems will continue for the foreseeable future.
Still, when these lucrative routes do return, IAG could achieve windfall profits. Figures indicate there are travellers are willing to spend more on flights and holidays now than they were before the pandemic after being stuck at home for nearly two years.
Therefore, when IAG and BA can ramp up transatlantic flights, they may be able to sell more premium services, helping the group’s overall recovery.
The enterprise is also looking to start a low-cost airline, which will fly out of Gatwick. This may help it break into the low-cost European travel market and provide additional diversification.
Despite these initiatives, I’d avoid the IAG share price until we have some more certainty on when transatlantic travel will return. In the meantime, I think the stock will continue to languish.
