Why did British Airways’ parent International Consolidated Airlines Group (LSE: IAG) see its share price crash by a quarter between February and March? Easy: the market pushed the IAG share price down around concerns about higher jet fuel prices and weakened passenger demand.
For now, there is no settled peace in the region. But if that comes, what might it mean for the IAG share price?
The market’s already been pricing in recovery
Perhaps surprisingly, I reckon the answer might be ‘not that much’.
I expect that any formal viable peace deal in the region could provide a short-term lift to airline shares, including IAG.
But there is an interesting anomaly here. The IAG share price is already within 2% of its late-February high.
Wizz Air remains 15% below its late-February high. easyJet is actually 6% higher than it was back then, although that boost partly reflects potential takeover interest.
In other words, the market seems already to have discounted the possible impact of ongoing fallout from the conflict on IAG’s business, at least judging by its share price.
Are things back on track?
That seems premature to me.
Volatile jet fuel prices do not look set to go away any time soon despite recent falls. IAG already conceded last month that, “the impact of the higher fuel price will inevitably lead to lower profit this year than we originally anticipated”.
Even if the Middle Eastern conflict winds down fully soon – which is by no means certain – ongoing supply damage and supply chain dislocation could mean that jet fuel prices remain volatile for months to come.
As for passenger confidence recovery, I think that could take years.
IAG has been shifting planes away from Middle Eastern routes onto ones elsewhere where it foresees strong demand.
That could mitigate the impact on passenger numbers of the Middle Eastern conflict. Time will tell how successful the strategy is.
I’m not tempted at this price
Looking at the IAG share price – up 37% in a year – there seems to be little obvious evidence of some of the challenges the aviation industry has lately been facing. After all, that is slightly better than double the 18% gain seen in the wider FTSE 100 index during that period.
As I think expected recovery is more or less priced in already, I do not expect that any solid Middle Eastern peace deal would necessarily boost the share price much.
Should I buy anyway?
At eight times earnings, the price may not look expensive.
Investors who have taken advantage of past industry volatility have been handsomely rewarded: the price has more than doubled over the past five years.
But, despite the implied maket nonchalance reflected in the share price, I continue to dislike the risk profile for IAG. Fuel prices remain highly volatile. Economic confidence has been damaged, certainly in the Middle East but also in key IAG markets including Europe and North America.
That is a heady mixture. I am not convinced it is properly factored into the current share price. I will not be buying any IAG shares any time soon.
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Christopher Ruane does not hold positions in any of the shares mentioned.
