In the last two years, the International Consolidated Airlines Group (LSE:IAG) share price, has surged 165%.
It’s a pretty extraordinary return from a business that most investors had written off as broken after the pandemic. Yet despite that enormous run, the shares still trade on a price-to-earnings (P/E) ratio of just 7.9. That’s the kind of valuation usually reserved for companies in serious trouble, not ones posting record profits.
So why’s IAG still so cheap? And is now the time to do some shopping?
The business is delivering in a big way
Looking at the group’s latest (first quarter) results, revenue grew 1.9% to €7.2bn, comfortably ahead of analyst expectations, while operating profit surged 77.3% to €351m on the back of broadly flat costs.
Digging deeper, the premium cabin demand is the standout story.
Business travel continues to recover strongly, and the transatlantic routes that British Airways (BA) dominates are proving especially lucrative. BA now accounts for roughly half of group operating profits and holds an enviable portfolio of Heathrow slots that are near-impossible to replicate.
The Loyalty division is also quietly outperforming, with revenue up 10% paired with a 32.6% boost to profits at a 20.1% margin. And with all that in mind, it isn’t so surprising that the average consensus from institutional analysts suggests that the IAG share price will continue to rise from here, reaching 523p by this time next year.
But if the business is beating profit expectations and the experts are calling for the stock to go higher, why have IAG shares struggled to climb in 2026?
What’s keeping the valuation so depressed?
The answer isn’t anything nuanced. It’s fuel costs. The Middle East conflict’s sent IAG’s full-year fuel bill to an estimated €9bn, roughly €2bn above what was planned at the start of the year. And while management expected to pass on around 60% of this to customers through higher ticket prices, the remaining 40% will nonetheless apply notable pressure to margins and cash flow.
In fact, free cash flow guidance for 2026 has already been pulled back. And if tensions in the Middle East continue to escalate, another outlook downgrade could be on the horizon.
It’s a sharp reminder that airlines are cyclical, capital-intensive, and highly sensitive to things entirely outside their control. And the stock market has unsurprisingly baked this uncertainty into the share price. That’s why IAG shares are trading at a seemingly cheap P/E ratio today.
The question now is, should investors take advantage?
A stock worth considering?
On the surface, the low P/E ratio makes IAG shares appear cheaper than they actually are. The fuel cost uncertainty might be a short-term problem, but if the wrong conditions materialise, it can rapidly evolve into a substantial one.
In other words, there’s a lot of risk surrounding this enterprise right now even with a financially disciplined management team at the helm. For investors willing to take on the geopolitical risk, IAG could emerge as a top performer if the war in the Middle East cools.
But personally, I think there are better opportunities to explore elsewhere. Such as…
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Zaven Boyrazian does not hold any positions in the companies mentioned.
