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Shares in British Airways owner International Consolidated Airlines (LSE: IAG), or IAG, have taken off recently. Had you invested £5,000 in them two months ago, that capital would now be worth around £6,000.
Can they continue to soar? Let’s take a look at the set-up.
The backdrop has improved
Two months ago, there was quite a bit of uncertainty here. At the time, the US and Iran were locked in open conflict and oil prices – a major cost for airlines – were sky-high.
Fast forward to today and the backdrop for IAG is far more stable. There’s still some uncertainty over the geopolitical landscape, of course. But oil prices have come down significantly, which is great news for the airlines.
Oil price risks
Now, we can’t rule out another spike in oil prices. If recent shipping attacks in the Strait of Hormuz escalate, oil could easily shoot up again.
The good news is that IAG is about 70% hedged in terms of fuel prices for the rest of the year and also has levers to pull to offset higher costs. So, while a spike could hit its profits, it’s unlikely to be a total disaster.
Demand is robust
Turning to demand, the backdrop appears to be favourable. In its Q1 results, the company said: “Demand for travel continues to be robust in our main markets and we have seen resilient booked revenue for the second quarter at 80%, which is in line with historical levels.”
One thing the company has going for it here is that its flagship British Airways brand serves a more affluent customer base. These customers are less likely to cut spending on travel amid the cost-of-living crisis.
Another positive for IAG is that there are a lot of cashed-up Americans who are keen to travel to Europe. And the US/UK route is where IAG makes a lot of its money.
It’s worth noting that passenger revenue in the first quarter of 2026 was up 4% year on year. That was despite all the chaos in the Middle East.
How’s the valuation?
In terms of the valuation, it’s relatively low at present – the forward-looking price-to-earnings (P/E) ratio is only 8.5. By contrast, US airline powerhouse Delta Airlines is trading at 15.7 times this year’s earnings forecast.
However, it should be noted that the P/E ratio for IAG has historically been quite low. One reason for this is that this airline operator is highly cyclical meaning that strong earnings are typically unsustainable over a long period.
Analysts are bullish
City analysts do see potential for share price gains from here though. At present, the average price target is just over £5.
Some firms have significantly higher price targets. For example, Barclays just put a 575p target on the stock.
A favourable set-up
Putting this all together, the set-up here looks quite favourable, to my mind. I wouldn’t be surprised to see the shares go higher.
That said, airlines are higher-risk, cyclical investments. So, while the shares could be worth a look, there could potentially be better stocks to consider buying for the long term.
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Edward Sheldon does not hold any positions in the companies mentioned
This story originally appeared on Motley Fool
