Image source: International Airline Group
It has been a good few years for shareholders in British Airways’ parent company International Consolidated Airlines Group (LSE: IAG). The share price for IAG (as it’s known) is up 27% so far this year and has more than doubled over the past five years.
However, a look at the price chart shows that it seems to have gone into something of a holding pattern – with the current price the same as it was back in July.
Is the share just taking a breather before potentially gaining more altitude, offering me a buying opportunity for my portfolio? Or could the recent lack of upward momentum signal waning investor enthusiasm?
Apparently cheap valuation
Despite its strong performance over the past five years, the IAG share price-to-earnings ratio is still only 7. That potentially looks very cheap.
The company owns multiple large, well-known airlines. It has dominant positions at airports including Heathrow. It has also improved its financial performance markedly in recent years, riding the wave of leisure travel demand that followed the pandemic.
In the first half of this year, for example, IAG recorded year-on-year revenue growth of 8%. Basic earnings per share soared 48%, while net debt fell by over €2bn to €5.5bn.
The company said it was continuing to see robust demand and is “confident in delivering good earnings growth, margin progression and strong returns to shareholders this year”.
If things continue well, then the current share price does look pretty cheap to me and I think there could be room for the price to move further upwards.
Possible turbulence ahead?
But why has it not been doing that over the past couple of months?
I have learned a few things by owning airline shares over the years, including this one.
Passenger demand can fall suddenly. The economics of the business are fragile, as there are high fixed costs like plane leasing charges and fuel bills for routes that basically cannot be cut even when demand falls (as some airports operate a ‘use it or lose it’ policy for landing and take-off rights).
IAG pointed to weakening demand in economy cabins for leisure travellers originating from the US. I think that set alarm bells ringing for some investors, perhaps explaining the share’s performance since July. With many key economies looking fairly unpromising and discretionary consumer spending tightening, I would not be surprised if airlines more generally start to report softer demand.
With its changes to British Airways’ loyalty programme, I reckon IAG may have hurt rather than helped build passenger loyalty. And while it has reintroduced some elements of service after removing them before, I believe IAG’s relentless cost-cutting of recent years has likely permanently damaged many passengers’ perception of its brands.
When times are good enough, companies can treat their customers largely how they choose and still do well. But when demand weakens, the long-term impact of relentless cost-cutting often rears its head.
I see a real risk that leisure demand for flights will fall markedly over the next several years. Meanwhile, business demand has never really come back fully since the pandemic.
On that basis, while the share price does look quite cheap based on current earnings, I am wary of the longer-term outlook and will not be investing.
This story originally appeared on Motley Fool
