International Consolidated Airlines (LSE:IAG) shares are bouncing back. Tensions over the Iran War rumble on, but the FTSE 100 airline group is recovering nicely. At 403.7p per share, it’s up 8% over the last seven days. How has IAG’s share price managed to spring higher, then? And where will the FTSE 100 firm head to next?
What’s happened?
The British Airways owner’s risen largely on the news it plans to repurchase €825m worth of convertible bonds due in 2028. IAG’s announcement on Monday (12 May) has several positives for shareholders when the transaction likely completes in the coming days.
These include:
- Eliminating the threat of these bonds being converted into shares, meaning earnings will be spread across fewer shares.
- Existing shareholders will retain a larger percentage of the business.
- Lowering IAG’s financing costs over time.
- Signalling management’s confidence in its liquidity and future earnings.
This isn’t the only news coming out of IAG in recent days, though. The problem is that other developments are far, far less encouraging…
Turbulence rising
The Footsie firm has also released fresh trading numbers in recent days (8 May). It painted a picture of a company under mounting pressure as the Iran War drags on.
Sales rose 1.9% in the first quarter, IAG said as it reported “strong demand across most of our markets.” Demand was especially strong for its Premium cabins and across its transatlantic routes, of which the latter makes up around half the group’s capacity.
The problem? Soaring fuel prices more recently, which have forced IAG to cut its full-year profit forecasts. The company said it now expects the Middle East conflict to have a more substantial impact throughout the rest of the year as the increase in the fuel cost starts to manifest itself.
IAG is reducing capacity growth to deal with the crisis. It’s also expecting to recover around 60% of higher fuel costs “through our revenue and cost management actions.”
But how effective will these actions prove?
Growing threats
I’m not so hopeful. Just how far will IAG be able to hike fares to offset rising fuel prices as consumers cut back?
‘Not by much’ is my view. Judging from recent data, the business may struggle to shift tickets even if they stay at today’s prices. According to Barclays, household spending in the UK fell at the fastest pace for 16 months in April.
And here’s the thing: travel spending fell 5.7% last month, accelerating from 3.3% in March. Airline spending collapsed 8.3% year on year, with one-in-six consumers saying they’re delaying making holiday-related decisions “until they feel the outlook has stabilised.”
Are IAG shares a possible buy?
When this happens is anyone’s guess, given the situation in the Middle East and uncertainty over its eventual economic impact. Similar caution is being seen in other key IAG markets, too.
I don’t feel these rising revenue and cost threats are baked into IAG’s share price. And this leaves it in danger of a sharp correction in the weeks and months ahead. The price-to-earnings (P/E) ratio is 7.9 times, well above the long-term average of five.
IAG shares might be worth a look for more risk-tolerant investors. But I won’t be buying the FTSE company for my own portfolio.
