The IAG share price could soar soon as global travel restrictions continue to loosen. But rising interest rates, oil prices and a potential demerger continue to weigh on the FTSE 100 airline owner.
The IAG (LON: IAG) share price is up 4% today to 172p, largely recovering from the dip at the start of the week. It’s up 20% since the start of the year. And in just 10 days, the British Airways and Iberia owner is reporting 2021 full-year results.
IAG shares could soon be at cloud 9 or sinking back to covid-19 pandemic lows.
IAG share price: shifting geopolitics
The tension between Russia and Ukraine is wreaking havoc on markets worldwide. Russia has surrounded Ukraine with over 145,000 troops as it seeks a guarantee that it will not join NATO. Ukraine has refused to give up this sovereign right. US President Biden has warned an invasion could happen ‘any day’ but agrees with UK PM Johnson that a ‘crucial window for diplomacy’ remains open. If war erupts in Eastern Europe, all airlines, including IAG will be hit hard.
But this central story has hidden important developments concerning travel restrictions across the developed world. Four days ago, Health Secretary Sajid Javid announced that fully vaccinated travellers to the UK no longer need to take a covid-19 test upon arrival.
Spain has also dropped its demand for travellers aged 12-17 to be fully vaccinated. 12.3% of the country’s GDP is derived from tourism, and the rule has kept many families from holidaying in the country. In France, the requirement for fully vaccinated travellers from the UK to France to take a pre-departure test has been lifted.
And in Norway, almost all restrictions have been dropped, with PM Jonas Gahr Store saying ‘the covid-19 pandemic is no longer a great threat to the health of most of us…we can return to normal everyday life.’ Next week, Australia is reopening to vaccinated tourists for the first time in nearly two years, following the USA’s example from November last year.
It appears that vaccination success and domestic financial pressures are now outweighing concerns over the Omicron variant.
IAG share price concerns
There are two long-term concerns for the IAG share price. The first is the rising threat to profit margins coming from increasing costs and competition.
The UK’s Consumer Prices Index inflation rate is currently at 5.4% and is expected to rise. The Bank of England has responded by increasing the base rate to 0.5%, and markets are pricing in an increase to 1.25% by the end of the year. IAG is sitting on a €12 billion debt pile that is only going to become more expensive to maintain.
Meanwhile, Brent Crude is at a multi-year high of around $94. The Bank of America predicts it could hit $120 a barrel by June. As almost every plane in the sky uses oil to fly, IAG may need to increase ticket prices to maintain margins.
But there is a cost-of-living crisis engulfing developed nations that could see demand for tourism fall at current prices already. And competitors including Ryanair are cutting fares in the first sign of what could become a price war.
The second is the eventual result of ongoing talks between the UK and EU on the post-Brexit settlement, which could see EU airline ownership rules reinstated. According to EU regulations, which were suspended post-Brexit, airlines operating in the bloc must be ‘owned and controlled’ by EU companies.
HSBC analyst Andrew Lobbenberg says that Germany and France are pursuing a reinstatement of this rule, which would force IAG to spin off British Airways into a separate company. As Lobbenberg explains ‘National interests are ever present in the airline industry…the commercial interests of Air France-KLM and Lufthansa would unquestionably be supported by adding new strategic challenges to IAG.’
He does say that Spain, Ireland, and Hungary would argue in favour of the current status quo. However, this leaves the IAG share price at the mercy of political negotiations that have not always worked out in the UK’s interests.
IAG was aiming to reach 60% of pre-pandemic passenger levels by end of 2021. In ten days, investors will find out if this target was met. And outlook guidance for 2022 could potentially forecast a return to pre-pandemic capacity levels soon.
The IAG share price was worth 623p just before the pandemic struck. It could be flying back to this price point shortly.
*Based on revenue excluding FX (published financial statements, June 2020).
Charles Archer | Financial Writer, London
16 February 2022