IAG shares: the FTSE’s best airline stock to buy in 2023

Since bottoming out at 94p in October, the stock at International Consolidated Airlines Group (LSE:IAG) has rallied more than 50%. With the travel sector showing no signs of cooling, I think the stock could continue its upward trajectory in 2023.

International final

The main reason behind the bullishness for IAG shares is the strong performance of the industry. Travel demand remains strong as consumers continue to go on holiday after the Covid restrictions. So, it’s no surprise that CEO Luis Gallego is guiding passenger capacity to 95% of 2019 levels in Q1 this year.

This view cannot be taken lightly either. RyanairThe latest update continues to show strength as air ticket sales show no signs of cooling. Consequently, the budget airline increased its profit outlook for the year.

In addition, industry data forecasts that forward bookings are expected to decline sharply to 2019 levels, particularly for international travel. Also, as China continues to relax most of its Covid restrictions, this could boost IAG’s stock.

Upgrade the margin

International flights are considered more profitable in most cases. In addition to operating on a larger economic scale, the group also benefits from luxury travel, where First and Business Class products are sold.

Some will argue that the UK’s impending recession could lead to this recovery, but I beg to differ. Luxury goods and services tend to be more immune to economic downturns because of their more affluent customer base.

Furthermore, oil prices continue to fall with more refineries coming back online. This should allow jet fuel prices to drop as well. Therefore, all these factors should serve as additional tailwinds to increase IAG’s revenue passenger kilometers (RPK) and expand its margins beyond the likes of easyJet and Jet2.

Cash flow increases

But most importantly, investors expect all of this to translate into strong, positive free cash flow. In the most recent quarter, the conglomerate returned to profitability. However, investors need to see improvements in the balance sheet before pushing IAG’s share price higher.

Available debt levels continue to decline, and free cash flow continues to increase, the FTSE 100 stalwart can give shareholder returns in the form of dividends as soon as 2024. This will surely attract dividend investors. This is because IAG stock can be a profitable passive income stock.

Having said, German and JP Morgan still has the stock ‘hold’ with an average price target of £1.40. This does not provide much upside from the current stock price. In fact, one can argue to sell at this level! However, it should be noted that the rating was given in October, when IAG’s share price was at its lowest level in a year.

Given the drastic improvement and recovery in the financial situation, along with the strong travel sector, I hope these investment banks will fishing up the target price in the expected time. What’s more, a price-to-sales (P/S) ratio of 0.5 indicates a bargain at that level. Thus, I would be interested in buying IAG shares if my preferred broker launched UK shares on its platform.