International Consolidated Airlines (LSE: IAG) has made a pretty good start to 2021. And it was leading the FTSE 100 on Wednesday morning, before being overtaken by a few other recovering stocks. Still, it’s up 2% on the day — and I’d be happy with 2% every day. But better than that, the IAG share price has gained 23% since the start of the year, way ahead of the Footsie’s 6.6% rise. Against that though, we’re still looking at a 65% fall over the past two years, covering the pandemic crisis.
The prospect of a return to flying off on holiday will be boosting confidence. But that might have wavered in the past couple of days, amid fears of a third Covid-19 wave.
Still, I don’t invest for the short term. And with the owner of British Airways having successfully refinanced itself over the past year, I see little chance of it going bust. So I turn to trying to evaluate the IAG share price on its long-term potential. And that’s where I’m torn.
Looking like good value?
My Motley Fool colleague Rupert Hargreaves has been looking back at the airline’s pre-pandemic performance. In 2019, IAG reported a €1.7bn net profit. If it can return to those levels, Rupert’s calculations indicate a P/E multiple of around 7.5. I’d see that as a screaming bargain, and I’d be tempted to buy right away.
Except, there’s a question I can’t answer. Will International Consolidated Airlines actually get back to 2019 profitability? If so, how many years will it take? And how will the stock valuation need to be adjusted to allow for the firm’s expanded debt? How much will all this affect the apparently low IAG share price of today? OK, that’s lots of questions.
Looking at the first one, the likelihood of seeing pre-pandemic profits again soon, I’m seriously doubtful. Prime minister Boris Johnson reminded us this week that Covid-19 is not just going to disappear, saying that “…we must, as far as possible, learn to live with this disease as we live with other diseases.” I reckon that’s likely to put a drag on air travel for some years to come.
And it’s not the only thing. Aviation contributes a considerable amount to carbon emissions, and the PM has brought forward the UK’s emissions targets rather ambitiously. I see significant pressure on the airline business from that direction too.
IAG share price still low?
Saying all that, I don’t need to see an IAG share price so low that we’re looking at a P/E of just 7.5. Even something close to the long-term FTSE 100 average of around 14 could still make the shares worth buying. And over the next two or three years, I do think there’s a bigger chance of gains than losses.
I’m going to fall back on my general rule of never buying shares in an airline. I don’t like companies that have no control over their operating environment. And I don’t like companies that compete only on price. So while I am upbeat about the prospects for the IAG share price, it’s not one for me.