Will the booming IAG share price break the £2 barrier?

Investing in airlines is not for the faint of heart. They often see dramatic profits, as many key factors such as fuel costs and passengers’ willingness to travel are largely out of their control. Take British Airways‘parents International Consolidated Airlines Group (LSE: IAG) is an example. IAG’s share price has risen by around 70% in three months. This is a quick high gain.

Does the rise continue and mean the shares reach £2 each?

Positive sentiment

Airlines are back in business and in a big way.

After several very challenging years, most international travel restrictions have been lifted or reduced. There is a growing demand for leisure travel. Business travel has rebounded, albeit more strongly in some markets than others.

IAG’s share price has risen 24% so far in 2023. Wizz it is up 39% and Jet2 has seen a rise of 28%. But in a year’s time, Wizz and Jet2 have seen their share prices fall by 46% and 15% respectively. It’s the same story at IAG. Even after the recent surge, IAG shares are 10% lower than a year ago.

I think the strong performance of the past few weeks reflects growing investor confidence that air travel is making a good comeback. But the long-term picture shows structural problems that continue to keep airlines running profitably.

Back to black

A look at IAG’s account illustrates that. Although it is now back in the black, two years ago there was a loss of 9.9 billion euros after tax.

Even when it’s going well, it’s rarely spectacular. In 2019, for example, the business made a profit after tax of €1.7 billion. But with a profit of €25.5bn, the number of net profit margins is less than 7%.

Balance sheet groaning

Many industries have margins that are thinner than that, but few have suffered huge costs from unforeseen events outside of their company’s control. The pandemic is just the latest in a series of unpredictable disruptions to flight demand. From terrorist attacks to volcanic eruptions, this remains a significant risk for IAG and its partners.

The long-term pattern of price shocks helps explain why IAG ended September with net debt of €11bn. At a time when interest rates are rising, that threatens to hurt profits badly.

Revenues have surpassed pre-pandemic levels and the company is once again profitable. But the risks remain and the underlying economics of IAG’s business combined with its balance sheet make it unattractive to me as an investor.

Does £2 appear?

So what does this mean for IAG’s share price where it could go from here?

After a strong recent performance, I believe a lot of investor optimism has been priced in.

The company has a market capitalization of £8bn. Even after the rise, the share price had to jump another quarter to reach £2.

In the absence of strong commercial performance, I don’t see an immediate driver. This may be the case only because investor enthusiasm continues to strengthen. After all, IAG shares passed £2 in 2021 despite the business’s poor financial performance. But stocks may fall again.

I remain unconvinced that IAG can continue to be profitable in the future. I have no plans to add stocks to my portfolio.