October saw a welcome loosening of travel restriction, both in the UK and around the world, which should be good news for airline companies like International Consolidated Airlines (LSE: IAG). But the IAG share price fell 8.2% during the month.
The stock had had a strong September, so maybe we’ve just seen a bit of profit-taking by those who got in during that month’s low. Just a couple of days into November, we’re already seeing a bit of an uptick. And we are, after all, looking at a 70% rise in the IAG share price over the past 12 months.
So maybe all we’re seeing is a market trying to adjust to the uncertain outlook for the sector, while not having a very clear vision of what to expect.
When I examined the stock at the beginning of October, I did think it was likely to have a positive month, largely because of improving economic indicators. But since then, I’ve seen growing signs that the optimism that’s enthused shareholders so strongly early in the year might have been misplaced.
When will long-haul aviation, and IAG in particular, get back to 2019 capacity levels and profits? Suggestions from Boeing have made it sound like it could happen by late 2023 or early 2024. And I think many observers are going along with that kind of timescale. It certainly sounded reasonable to me.
Slower return to flying
But the latest from Heathrow suggests the main British Airways hub is still only operating at around 45% of 2019 volumes. The airport’s boss, John Holland-Kaye, even suggested we might not see a full recovery in air traffic until as late as 2026.
International Consolidated Airlines, with its long-haul focus, is likely to be in the tail-end of the traffic recovery too. And I reckon this more sobering outlook has probably contributed to the IAG share price weakness of late.
Generally, I think the mixed recent news on the travel sector has led a good number of investors to revisit their assumptions. And rethink the kind of valuation the stock currently commands, and what it might really be worth now. The IAG valuation is still my biggest concern.
Right now, on an enterprise valuation basis (which accounts for debt), the whole company’s valuation still looks high. I’d expect there to be a significant discount to cover the uncertain outlook and resulting risk. I’m not seeing it.
IAG share price recovery
It is true that I am unusually bearish on the airline industry in general. I also need to see a good safety margin when investing in depressed companies that are going through hard times. Combine all that with my focus on dividends, and maybe I’m being too hard on IAG.
What might prove me wrong? Q3 results are due on 5 November. If there’s good news on passenger volumes, the IAG share price could benefit. IAG has previously suggested it should be flying at 45% capacity in the quarter.
I’ve already mentioned dividends. And any hints at when those might be reintroduced could provide an extra boost. Maybe November will be the bullish month I expected in October.