Shares in International Consolidated Airlines Group, known as IAG, the FTSE 100 stable of carriers whose largest constituent is British Airways, have over the past year traded in a fairly narrow band between 135p and 170p. Currently changing hands at 156p, IAG stock is flat on where it was a year ago.
It is by a long way the poorest performer of the UK-centric airlines. Shares in easyJet are up 14 per cent over the past 12 months. Ryanair stock has gone up 36 per cent.
But these two European short-haul airlines with lower-cost business models than the legacy carriers, which they have successfully disrupted, are in favour with investors, who see the easy gains in a capacity-constrained European market that is still enjoying good demand.
Ryanair and easyJet are the wrong comparators for IAG, which comprises BA, Iberia, Aer Lingus and Vueling. Between them the four airlines fly to five continents and are especially embedded on routes over the Atlantic.
IAG is one of Europe’s big three aviation conglomerates. Lufthansa, the German group that also controls the flag carriers of Switzerland, Austria, Belgium and soon Italy, has seen its shares dive 25 per cent over the past year. The Franco-Dutch combine Air France-KLM has witnessed a 32 per cent fall in its stock. Against these two, IAG is positively flying.
On Thursday IAG will report its financial results for 2023. They are expected to show pre-tax profits of about €2.9 billion on revenues of more than €29 billion. This is for a company that is valued on the London stock market at £7.6 billion.
This means its likely earnings per share for the year will come out at about 37p, meaning the shares currently trade at not much more than four times earnings.
Against any historical benchmark or even industry comparison — and yes, we are talking about the capricious and inconstant airline game — IAG’s stock market rating is very low.
Of course IAG could announce a downbeat assessment for the year ahead but if it had seen anything materially negative it would have been bound to disclose it before its results. And in any case, the City appears to be already bidding to the upside, with the stock price having appreciated 10 per cent over the past fortnight.
Long-suffering IAG followers may have a simple explanation for the company’s lowly rating: investors long ago lost faith in a business that seemed so capable of so regularly shooting itself in the foot.
Yet the current management team is way more professional than that which ran IAG for much of the first ten years of its creation during which customer relations plummeted.
The new crowd, of course, have struggled to show the fruits of their approach against the backdrop of the pandemic travel restrictions and changed travel habits, especially on long-haul.
But if the current management team is to be believed, there is much to come: profit margins of up to 15 per cent, when 10 per cent used to be regarded as a good effort; a doubling in the profitability of Iberia and Vueling; leveraging market pre-eminence to the US and Latin America; using strong cashflows to reduce debt accumulated during the pandemic; and to then return to paying dividends.
If IAG achieves only some of that, investors may start believing that the group has a proper business case.
Advice Buy
Why? Airlines are hostage to geopolitical fortunes outside their control but IAG’s investment rating is too low
On the Beach
When On the Beach floated on the stock market in 2015, there were lingering question marks over the online travel agent’s relationship with Ryanair. The Irish airline provides about 40 per cent of OTB’s seat requirements, yet the travel group had no guarantees over seat supply or low fares (writes Dominic Walsh).
The result was, inevitably, litigation, which since 2010 has been costing OTB about £2 million a year. While the travel group has been playing down the significance of the fractious relationship with Ryanair, the OTB annual report makes clear the genuine risk: “If Ryanair were to prevail [in the litigation], this could have a material impact on the group’s business”.
Now OTB and Ryanair have reached a new deal. So what does OTB get from yesterday’s agreement? As well as ending the litigation and switching the focus to building a rapport with Ryanair, its customers get secure, free and fair access to the Irish airline’s seats (alongside rivals such as Loveholidays and Tui Group). This, in turn, facilitates a smoother customer experience across the entire holiday, giving its customers the same benefits as the airline’s passengers while enabling them to continue accessing OTB’s flexible payment plans, customer perks such as free lounge and fast track access as well as ATOL protection.
Richard Stuber, an analyst at Numis, said that EasyJet, OTB’s second largest supplier with about 20 to 25 per cent of its seat requirements, said the airline had never carried the same risk profile nor had a similarly litigious relationship with OTB as it has had with Ryanair.
While OTB sets about implementing an interim technology solution for the next few months, the simplification of its booking and customer services function is expected to produce plenty of cost efficiencies. For example, customers of OTB will be sent information about their flight straight from Ryanair and will be given direct access to their booking via their Ryanair account.
All of which sent the shares soaring to close up 22p, or 15.4 per cent, at 163p.
Advice Buy
Why The resolution of the Ryanair situation creates a seamless long-term partnership that removes a barrier to a rerating of the shares
