International Consolidated Airlines (LSE:IAG) shares have taken a walloping over the past month. It’s perhaps not a shock considering how sensitive airlines are to rising oil prices.
Over the last month, the company — more commonly known as IAG — has slumped 12.1% in value. It means a £5,000 lump sum invested at the start of the period would be worth £4,395 today, a drop of £605.
The problem is, I think IAG’s share price may have much further to fall.
Cost pressures
With fuel accounting for roughly 20% of total operating costs, the firm’s fortunes are linked closely to how long the Iran war will last, and whether energy supply blockages can be solved in the meantime.
Unfortunately, forecasting either of these outcomes is fraught with uncertainty. Some have predicted the conflict lasting a matter of weeks. But with no obvious ‘off ramp’ for the conflict’s opposing sides, some analysts have said it could last months. Plans to reopen the Strait of Hormuz and get oil shipments flowing again have also failed to materialise.
Oil prices have doubled since the conflict began in late February. Further incredible gains aren’t out of the question, especially if oil infrastructure in the region is targeted again. But this isn’t the only issue for airlines.
What else could go wrong?
Major carriers have warned that higher fuel expenses will cause them to raise fares. The problem is, their ability to effectively do this without decimating ticket sales may be limited amid cost-of-living crises in key markets. IAG’s latest financials underlined growing stress on travellers’ budgets, with sales dropping 0.8% in the final quarter of 2025.
And the Middle East war will stretch many travellers’ budgets beyond breaking points, as those rising oil prices worsen inflationary pressures and prompt central banks to hike interest rates.
IAG’s is best known for its flagship British Airways airline. However, it also has exposure to the budget segment through its Aer Lingus and Vueling brands. Theoretically, this could help support group revenues as people switch down from more expensive carriers.
However, I think said support could be limited. Discretionary spending on travel and holidays typically falls quickly when times get tough. What’s more, IAG’s premium transatlantic services are a key profit driver. And this could be hit especially hard if things get worse.
Could IAG shares rise?
That said, the situation in the Middle East is extremely fluid, and a resolution could give a boost IAG shares. The FTSE 100 stock is certainly cheap enough to encourage investors if things improve — its forward price-to-earnings (P/E) ratio has tumbled to 5.9 times.
Right now, I won’t be buying the travel giant for my portfolio. But that’s not to say it won’t appeal to more adventurous long-term investors.
