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.

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Life has been turbulent for the FTSE 100 stock ever since the pandemic, which grounded its fleets and almost buried the business. Yet when flying eventually recovered, the IAG share price flew to the stars.

It suffered another period of bumpiness after Donald Trump unleashed his tariffs last year, which menaced British Airways’ lucrative transatlantic routes. When Trump eased tariffs, the shares soared again.

How much volatility can you take?

Inevitably, it’s on the front line of the Iran conflict too. British Airways quickly cancelled flights to Abu Dhabi, Amman, Bahrain, Dubai and Tel Aviv. Whenever Trump announces good news in the Gulf, the FTSE 100 rallies, and IAG is among the biggest risers. That was the case yesterday (6 May), when its shares jumped 6.9%. Yet on bad days, it numbers among the biggest fallers. Why would anybody buy a stock like this?

For two key reasons. First, overall, the direction of travel has been upwards. The IAG share price is up 35% in the last year, and 165% over three. Second, the shares still look astonishing value, with a trailing price-to-earnings (P/E) ratio of just 6.3.

I can see why some investors wouldn’t go near IAG. The airline sector is on the front line of every shock. Wars, oil price swings, natural disasters, recessions, terror, tariffs… almost every major threat you can think of threatens their revenues and profits. And don’t forget French air traffic controllers.

IAG runs a fleet of more than 600 aircraft, which carry more than 122m people to 285 destinations across 93 countries. An awful lot can go wrong. Profit margins of 15.1% offer some cushion, but it’s not that plump.

Can this stock get even cheaper?

With cyclical consumer stocks, I like to buy when they’re down rather than up. So could we be handed a big buying opportunity this summer? It’s more than possible. The full economic impact of the Iran conflict hasn’t hit home yet. That could change very quickly, if oil starts running out.

Jet fuel prices have already doubled, and airlines are starting to cancel flights, dropping 13,000 so far this month. More could follow, depends on events in the Strait of Hormuz. British Airways, Iberia and IAG’s budget carriers Aer Lingus and Vueling could all take a big hit. Let’s hope tensions ease and all goes well. But if they don’t, the IAG share price could suffer. That P/E could fall even lower. Just 18 months ago, it was below four. It could happen again, which would mean a very cheap share indeed. But investors will need strong stomachs to take advantage. And should only consider buying with a long-term view.

IAG is a binary bet right now. If we get a peace deal, its shares may shoot up instead. I hold IAG in my SIPP and I’m not selling either way. But if it does slump in the months ahead, I’ll be seriously tempted to buy more. So far, buying IAG on the dips has been a winning strategy for me.

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The Iran war has significant implications for airline stocks, from route disruptions to soaring costs. News on the conflict has been more encouraging in recent hours — Iran has signalled today (6 May) that the Strait of Hormuz could be reopened as the US pauses military operations.

IAG’s share price has risen on the news. But I’m not tempted to buy the FTSE 100 company. In fact, I’ve found 13,000 more reasons to avoid the British Airways owner today.

So what’s happened?

So far in May, airlines have cancelled 13,000 flights to conserve fuel and reduce costs. That’s according to aviation analytics company Cirium. Since the conflict began in February, jet fuel prices have doubled, as oil supply disruption has decimated fuel stocks.

IAG’s carriers like Aer Lingus, Iberia, and British Airways haven’t changed their schedules yet. But it’s a very real possibility in the weeks ahead as the Strait of Hormuz remains closed and a breakthrough on a lasting ceasefire remains elusive.

Of all of the world’s major airline operators, IAG could be especially impacted by fuel supply shortages, too. Why? The UK imports around two-thirds of the jet fuel it uses, reflecting the closures of major refineries in recent years. And the FTSE 100 firm generates substantial profits from its British bases, such as Heathrow where it controls around half of the London airport’s take-off and landing slots.

What next?

A Middle East ceasefire should put these fears to bed. The problem for me as an investor is progress on a peace plan remains difficult.

Senior market analyst Daniela Hathorn of Capital.com notes that

many key details remain unresolved, and past experience has shown that negotiations can quickly stall or reverse. Internal divisions within Iran, in particular, remain a potential obstacle to a smooth agreement.

It’s not just the impact of flight disruptions and soaring fuel costs that concern me, as significant as they are. Other consequences of the conflict are rising inflation and cooling economic growth, both of which threaten demand for discretionary items like holidays.

In the UK, consumer confidence has plunged to three-year lows. The same downward trend is being witnessed in other key markets like North America and Europe.

Here’s what I’m doing

There is one crumb of comfort for IAG, however. Through Aer Lingus and Vueling, it has exposure to the budget aviation market. The result? Demand across these carriers could rise if travellers choose cheaper services, or if they prioritise short-haul trips.

But this isn’t a guarantee, and it may not come close to offsetting damage elsewhere to the group. Long-haul travel — and especially transatlantic routes — are essential profit drivers for IAG. What’s more, the company has been working to increase the share of premium seats it offers. This could backfire spectacularly in the current climate.

Today IAG shares trade on a forward price-to-earnings (P/E) ratio of 6.9 times. That’s above the 10-year average of roughly five times, and is a premium that (in my view) doesn’t reflect the huge dangers it currently faces. So I’m looking for other stocks to buy.

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Am I looking at a brilliant bargain here? Or is the sell-off justified? One possible answer came in the last week when there was another twist in the tale…

Why the big news?

What happened? In short, IAG announced ticket price hikes were on their way. The elevated cost of jet fuel has persisted and the hedging of these costs can only protect airlines for so long. They’re running out of runway, so to speak.

Why is this big news? Well, it’s a strong sign that this whole episode is not going to just blow over. And when prices get raised, consumer behaviour often changes. How many passengers are going to opt for a domestic holiday or a lower-cost airline as a result? Lower demand for aeroplane tickets is a real risk for the company.

The conflict has already had meaningful changes to airlines. The early data suggests folks are avoiding far-flung destinations – the Middle East being a central hub to Asia and Australasia. That’s not even mentioning the cancellations to big travel destinations like Dubai.

It’s worth pointing out that this is coming just as airlines were starting to recover from the pandemic. COVID-19 took a wrecking ball to the sector. Inflation and a cost-of-living crisis came shortly after. Now 2026 has brought yet more woe.

All sounds pretty bad, right? Well, maybe not...

Is it a buy?

While there is a fair bit of doom-mongering about the possible problems on the horizon, there is nothing concrete to say operations will be massively impacted. For one, the latest forecasts suggest earnings and revenue are going to keep rising in the years ahead. And while no one can predict the eventual outcome of the current Middle East issues, a swift resolution is not outside the bounds of possibility.

And if the prognosis is indeed good, then it’s hard to look at this as anything other than a bargain. As mentioned, IAG is trading at just six times earnings – around a third of the FTSE 100 average. That means every share that is bought comes with around three times more profit than a typical Footsie stock. Buying cheap is at the heart of Warren Buffett’s ‘value investing’ approach. I think it worked out well for him.

The last word? There are real risks here but there is an opportunity too. I think IAG shares are worth considering.

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IAG, as it’s also known, ended the day 6.19% higher, worth £619 for somebody with £10,000 invested. Only gold miner Fresnillo did better. Was I surprised? Not at all. Because that’s what IAG does. It’s right on the front line of market volatility, and I can’t see any sign of that changing.

In the pandemic, it was absolutely hammered by global lockdowns. Its global fleet of aircraft was grounded, wiping out most of its revenues, but it still had to meet high fixed costs, such as aircraft leasing, maintenance, staff salaries and debt servicing. It also had to refund passengers for cancelled flights.

Bumpy FTSE 100 growth play

In 2020, IAG reported at €7.4bn operating loss. It only survived by slashing more than 10,000 jobs and borrowing like crazy, with net debt hitting €12bn. But survive it did, and when air travel took off, the shares flew. Net debt is down to €6bn today, but investors have learned their lesson. The airline sector is exposed to a world of risk.

Airlines are vulnerable to pandemics, extreme weather, volcanoes, air traffic control strikes, fuel prices, recessions and of course, war. They have almost no control over any of them.

IAG has duly been hammered by the Iran war, which has forced British Airways to cancel or reroute flights to major hubs like Dubai, Abu Dhabi and Tel Aviv. Jet fuel costs have soared and if we get shortages this summer many more flights could be cancelled, smashing revenues. Hence the outsized relief rally on Friday.

This may well have been overdone. We can’t say for sure whether Hormuz is open right now. IAG could give up all its recent gains next week, or it could fly to new highs. It’s anybody guess.

Dirt-cheap valuation

Despite all the ups and downs, the share price has done brilliantly. It’s up 62% in the last year, and 108% over five years. Dividends have been restored, and the trailing yield is 2.1%.

I bought the stock during another recent bout of turbulence, when Donald Trump’s ‘liberation day’ tariffs were rattling global stock markets. I’m glad I did, because the moment Trump announced a pause, IAG shares rocketed. 

They look staggeringly cheap today, with a price-to-earnings ratio of just 6.22. Don’t assume that makes them a no-brainer bargain though. They may remain cheap as investors demand a big valuation cushion in return for the added risk of holding them.

This is a stock to buy when the news is bad, in my view, rather than good. With a long-term view, IAG shares are worth considering, for investors who can withstand regular bouts of short-term volatility. If IAG is too hot to handle, don’t worry. I can see more brilliant FTSE 100 bargains out there, and most are nowhere near as volatile as this one.

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Despite these gains, IAG’s share price continues to offer some of the best value on the Footsie. At least, that’s the case on paper. Its forward price-to-earnings (P/E) ratio sits at 6.6, well below the index average of around 13.

Does this represent an attractive bargain opportunity?

Strong performance

IAG’s performance has remained rock-solid in a tricky period for the airline industry. Consumer spending remains under pressure in key markets, yet the British Airways owner continues to grow at an impressive rate.

Revenues increased 3.5% in 2025, helping drive underlying operating profit 13.5% higher, ahead of forecasts. It’s testament to the group’s excellent global networks and market-leading brands. An ongoing pivot to offering premium services is also paying off.

IAG has another major advantage: strong barriers to entry in the aviation hotspot of London. Capacity is constrained, and new airport slots extremely rare. By controlling around half of the slots at Heathrow alone, British Airways enjoys a dominant position on key routes, allowing it to command higher fares without the worry of losing business to competitors.

So what’s the catch?

The truth is, many stocks trade on rock-bottom P/E multiples for a reason. They can have poor growth outlooks, and/or face significant and rising risks. In the case of IAG, the dangers are growing rapidly as the Iran war rolls on.

The company has had to postpone flights on routes across the Middle East. But this isn’t its main problem. The conflict’s impact on the oil market is limiting supplies — around 20% of the world’s energy passes through the blocked Strait of Hormuz.

This creates two direct problems IAG. One is a sharp rise in fuel costs, the other a potential shortage of gas that could leave the group’s planes stranded on the ground. On Thursday (16 April), the International Energy Agency (IEA) warned that Europe has “maybe six weeks of jet fuel left“.

Even if the war ended tomorrow and the Strait reopened, it might still not be enough to avoid a shortage. After all, it takes weeks for oil tankers to reach their destinations from the Middle East.

Are IAG shares a buy?

The Iran conflict creates another significant, if indirect risk, for IAG shares. Rising oil prices are driving inflation higher, and weighing heavily on the economic outlook, as indicated by the IMF’s decision to slash global growth forecasts this week.

It’s a combination that could hammer demand for IAG’s services. After all, holidays away are among the first things consumers cut back on when times get tough. IAG could cut ticket prices to support sales, of course. But this would come at a high cost to its already threatened margins.

Long-term bargain hunters might want to give this cheap FTSE 100 share a close look. But I won’t be touching it with a bargepole.

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As the owner of several airlines, including British Airways, fuel costs are a big factor for the group Yet this past month it has emerged as a top performer compared to more budget‑focused airlines.

Since mid-March, the shares are up about 11.3%, outperforming rivals like easyJet and Wizz Air. Are investors leaning more towards the major airline operators rather than the ultra‑low‑cost model right now?

Living up to the hype

Financially, IAG appears deserving of attention. Earnings are up 36.5% year on year, and the company’s return on equity (ROE) sits around 49%, which is clearly appealing for investors.

The valuation also looks attractive, allowing lots of breathing room for further growth.

Its price‑to‑earnings (P/E) ratio is about 6.58, and the P/E‑growth (PEG) ratio is just 0.18. I’m sure most analysts would agree that’s surprisingly cheap for a firm with IAG’s profit growth and airline‑hub scale.

I guess that’s why consensus is a Strong Buy, with an average 12‑month target of around 485p — roughly 23% above today’s price.

So it’s a buy?

All good, so far. But not so fast. Strong earnings and a low price are a good start but it’s not all sunshine and roses. The balance sheet’s likely to raise a few eyebrows, with total debt standing at about £12.46bn while current assets are only around £11.36bn.

That’s a highly leveraged firm that could end up in a precarious position if earnings falter.

The group will need to keep generating strong cash flow and stay disciplined on spending if it hopes to stay above water. Especially if the Middle East conflict pushes fuel prices higher and squeezes margins.

On the upside, higher oil prices cut both ways. Yes, higher jet‑fuel costs threaten profits, but demand for long‑haul, premium‑priced routes stays buoyant. With strong, established brands and more business-class exposure, IAG can get away with charging more than low‑cost rivals like Wizz Air or easyJet.

If the war‑related risk keeps the skies more uncertain, the smaller airlines are more likely to take the brunt of the downturn. In the long run, that could help IAG’s relative position.

The bottom line

For long‑term investors, IAG looks reasonably priced and sits in the high‑return cyclical stock region, rather than defensive income.

Strong earnings growth combined with high profitability and an appealing valuation make it worth considering, in my opinion.

Still, investors may need to stomach some short-term volatility from fuel prices and geopolitics. Compared to Wizz Air and easyJet, IAG’s more diversified with higher earnings potential – but it’s still part of a troubled sector. 

So even as a standout in its class, it may be less appealing to investors seeking steady growth from undervalued stocks.

Fortunately, there’s a host of UK shares that look surprisingly cheap right now – and are less exposed to oil price shocks. For instance, 3i Group‘s forward P/E of 4.6 screams value to me, meanwhile its revenue is up 62.8% year on year. Frasers Group‘s in a similar position, with earnings up 53% year on year and a forward P/E of just 6.8.

And that’s just two of the many I’ve been eyeing lately.

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At 396.1p per share, IAG’s share price has gained ground after plunging at the start of the war in Iran. But it remains 6.3% lower than it was before the conflict began. And I fear the British Airways owner could be about to slide again…

Surging costs

Airlines are among the most vulnerable shares during this Middle East crisis. With oil prices spiking due to supply disruptions, these businesses face a sharp rise in costs. Fuel makes up roughly a quarter of their operating expenses.

Jet fuel prices have more than doubled since the start of the conflict, and were last around $1,530 per tonne. This is even more of an issue as many long-haul routes are covering larger distances by avoiding some Middle East airspace.

But it’s not just higher costs IAG needs to worry about. It’s also facing the prospect of not having enough fuel to get its planes off the ground. On Friday (10 April), the Airports Council International Europe (ACI Europe) told the EU that shortages could emerge within three weeks if the Strait of Hormuz remains closed. That’s according to the Financial Times.

Are there other risks?

The longer the conflict persists, the greater these risks become. But this creates another huge problem — more route disruptions, as key Middle Eastern destinations are avoided.

Flights between Amman, Abu Dhabi, Bahrain, Doha, Dubai, and Tel Aviv have all been impacted in recent weeks. And though IAG plans to restart some in the next several weeks, an escalation of the conflict could scupper these plans.

It’s already warned of “further changes to our flying schedule” on Friday, announcing plans to trim the number of flights to Doha, Dubai, Riyadh, and Tel Aviv from pre-war levels.

Are IAG shares a buy?

Add in the impact of the war on broader inflation and economic growth, and I think things could get very tough for IAG and its shares. Holidays are among the first things consumer trim back on when they’re feeling the pinch. This could potentially prompt the company to slash its profit forecasts, with knock-on effects for the share price.

It is worth noting, however, that the popularity of brands like British Airways could help IAG outperform the broader sector. And with its budget airlines Aer Lingus and Vueling, it might also benefit if cash-strapped customers switch down from premium- and mid-tier operators.

Yet, for me, the risks of owning IAG shares are too high in the current climate. And especially when you consider that fierce competition is also putting the company’s sales and profit margins under huge pressure. On balance, this is a FTSE 100 share to think about avoiding.

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The question now becomes, is this a buying opportunity for long-term investors or a warning to stay away?

What happened to the IAG share price?

The company’s recent share price crash has been driven by three overlapping factors that all hit at nearly the same time.

1. Its 2025 full-year earnings beat expectations, but near-term guidance was murky alongside large planned capital spending, rattling investor confidence.
2. The war in Iran erupted, sending oil and, in turn, jet fuel prices through the roof while also disrupting travel routes through the Middle East.
3. The threat of new US tariffs applying pressure to UK and European economies – something that IAG’s highly sensitive to.

Combining these headwinds with the fact that IAG shares have actually been on a pretty strong bull run over the last couple of years, it isn’t surprising to see some investors lock in profits. And it’s also worth pointing out that even after this recent sell-off, the shares are still up more than 60% over the last 12 months.

However, as a result of this pullback, IAG’s price-to-earnings (P/E) ratio is now deep in value stock territory at just 6.1. And on a forward basis, the shares look even cheaper at a P/E of just 5.6.

So should investors take advantage of weakened sentiment to snap up what appears to be a screaming bargain?

Bull versus bear

Beyond an undemanding valuation, IAG’s business looks fundamentally impressive. As previously mentioned, its 2025 results firmly beat analyst forecasts, with margins reaching record levels. That’s paving the way for plans to return a jaw-dropping €1.5bn to shareholders in the next 12 months, starting with a €500m share buyback programme.

What about the surge in jet fuel prices? Here, there’s some valid concern. For context, the International Air Transport Association’s Jet Fuel Price Monitor shows that the weekly average cost per barrel of jet fuel on 27 February was $99.4. As of 27 March, it’s closer to $195.19 – a 96.4% increase in a single month, just as we approach peak summer travel season.

With a 62% fuel hedge in place, IAG does have some insulation against rising prices. But compared to many of its European peers and rivals, that level of hedging is actually lower than the 70%-80% average. And if the war rages on, 2026 could prove to be a disappointing year against 2025’s stellar results.

The bottom line

IAG’s seemingly in a tough spot. And subsequently, its recent sell-off into value stock territory makes a lot of sense. However, if the war in the Middle East is (hopefully) resolved promptly, then investors may indeed have overacted, creating a buying opportunity.

All things considered, the company remains shrouded in geopolitical uncertainty. And with other airlines seemingly being better equipped to absorb a protracted conflict, it might be worth keeping IAG on a watchlist for now.

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There has been significant re-routing and assets stuck in the wrong place. But it’s also an issue of jet fuel prices.

According to IATA data, the global average jet fuel price stood at $99.40 per barrel in the final week of February. By mid-March it was $175.

By the week ending 27 March, it had hit $195.19 — a near-doubling in five weeks. For an industry where fuel is typically the single largest operating cost, these rises are not background noise.

The benefits of hedging

IAG and its European peers don’t simply buy fuel on the spot market and hope for the best. They hedge. This means buying financial contracts — usually options or swaps — that lock in a price for future fuel purchases months or even years in advance.

It’s like an insurance policy if the prices spike. If prices fall, you’ve overpaid for protection — but most airlines consider that a price worth paying for budget certainty.

IAG looks reasonably well-covered for now. The group had around 75% of its Q1 2026 fuel requirements hedged, falling to roughly 64% in Q2, 58% in Q3, and 50% by Q4.

For the full year, that averages out at about 61%. In other words, the first half of 2026 is largely shielded, but as hedges roll off through the summer and autumn, IAG becomes increasingly exposed to whatever spot prices do next.

And the IATA crack spread — the refining margin between crude oil and jet fuel — has blown out to $81.44 per barrel, up 287% compared to a year ago, suggesting structural pressure beyond just crude.

A better entry point

Strip out the geopolitical noise and the numbers — which is where every investment thesis should start — are attractive.

IAG trades on a forward price-to-earnings of just 5.5 times and an enterprise value-to-EBITDA of 3.16. This is certainly more attractive than it was five weeks ago.

Analyst consensus sits at a price target of €5.70 — implying around 42% potential appreciation from here. Net debt has fallen dramatically, from nearly €10bn in 2021 to under €6bn last year. What’s more, the operating margins are incredibly strong for the sector.

What’s more, it’s also diversified in a way that’s easy to underestimate. British Airways on premium transatlantic routes, Iberia into Latin America, Vueling as a budget European operator, and Aer Lingus offering low-cost transatlantic. Different brands, different cabins, different geographies.

That diversification matters when one market goes cold.

The bottom line

I held IAG as my favourite in the sector for a long time. But after a significant re-rating (surging more than 200%), I shifted attention to Jet2, which I think offers considerably better value once you adjust for the balance sheet — a net cash position that IAG simply can’t match.

On a risk-adjusted basis, Jet2 is the more compelling opportunity to me and appears to be slightly better hedged. Nonetheless, both stocks are worth considering… investors just need to keep one eye on the conflict.

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