With IAG shares stalling, is now the time to buy?

After jumping as much as 80% from its lows in October, IAG (LSE:IAG) shares have been flying high. However, the stock has lost some momentum recently, down 20% since early February. But given the bright outlook for the travel industry, could this dip be a buying opportunity for me?

Heavy transactions

The group’s latest earnings report will put a smile on investors’ faces, I feel. Capacity continues to recover along with passenger numbers. Meanwhile, operating profit rose by €4.2bn from the previous year. However, despite the blowout numbers, IAG’s shares continued to fall.

This can be attributed to the weakness of FTSE 100 overall, but I imagine investors were not very happy with the elephant in the room either – the Air Europa deal, which has left many worried for several reasons.

IAG already has a 20% stake in the Spanish company. However, management has now opted to buy the remaining 80% and consolidate it for €400m. This would normally be good news because of the huge earnings potential for IAG, but investors seem to be thinking nothing of it, dumping the stock.

This is most likely due to the already fragile state of the conglomerate’s balance sheet. And with the deal awaiting regulatory approval, IAG may have to pay penalties if it fails. However, even if passed, acquisitions may delay the company’s return to dividend payments.

Turbulent attacks

As for the more sour sentiment, IAG has said it faces short-term turbulence. Staff at Heathrow Airport are expected to go on strike over the busy Easter holiday, forcing British Airways IAG to cancel 32 flights a day.

Although this has not significantly affected the airline’s bottom line, there is a possibility of future industry action that has shareholders worried. And as long as inflation stays up, disruption is more likely than not.

Then there is the concern about fuel costs. Jet fuel prices have fallen sharply from their highs. Even so, they are still high and will continue to eat into IAG’s profits. After all, United Airlines recently downgraded its outlook for Q1 due to higher costs.

Can IAG shares rise again?

Although the current drop in IAG’s share price looks like travel demand is starting to cool, industry data suggests otherwise.

International seats flown continue to recover to pre-pandemic levels, and are expected to continue to grow. This sentiment is supported by Booking CEO Glenn Fogel, who says the short-term outlook for the travel sector looks bright.

Therefore, I believe that IAG shares will rise again and rise again. That said, even though the price tag seems low, it’s still above the industry average in general, especially when comparing budget and US counterparts.

And despite the broker UBS, Germanand Liberium rate the stock ‘buy’ with an average price target of £1.68, there are other cheaper airline stocks with better financials and higher price targets that I would prefer to invest in. So, I wouldn’t buy IAG shares today.