Five years ago, IAG (LSE: IAG) shares appeared to be a fantastic investment. After years of struggling with high costs and low demand, the company finally seemed to be breaking out. Profits were rising, and the corporation was so optimistic it decided to hike its dividend by around 30% in 2016.
Initially, growth continued with net profit rising from €1.5bn in 2015 to nearly €3bn by 2018. Then the coronavirus pandemic arrived. In 2020, the group reported a horrendous loss of €7bn. It was losing so much money last year there was a genuine chance the corporation would collapse.
Investors who stayed with the company through this turbulent period have lost a substantial amount. According to my figures, if I had invested £1,000 in the enterprise five years ago, I would have just £570 today. These figures include reinvested dividends. That is a total overall decline of 43%.
The big question is whether it’s worth buying the stock ahead of a potential recovery.
Are IAG shares worth buying?
IAG, which owns the British Airways brand among others, is not the only airline in the world. Plenty of its peers have had to scrape through the pandemic.
But some of these have achieved a much better performance for shareholders. Wizz Air (LSE: WIZZ), a low-cost carrier that operates primarily in Central and Eastern Europe but also has operations in the UK, has been able to capitalise on the current environment to grab market share.
What’s more, as IAG tries to tap all of its financial resources to survive, Wizz has been expanding. It recently placed a substantial order for new aircraft, increasing its capacity and reducing fuel consumption.
And as IAG continues to lose money, Wizz recently announced a return to profitability, although it is unclear if this trend will continue.
Over the past five years, Wizz’s profits and revenues have grown substantially. Its share price has reflected this growth, with the stock returning more than 18% per annum. If I had invested £1,000 in the company back in 2016, this investment would be worth nearly £2,500 today.
The performance gap between Wizz and IAG shares shows clearly how the fortunes of these two airlines have differed over the past five years.
Future growth potential
Past performance should never be used as a guide to future potential, of course. So, just because the low-cost carrier has outperformed its peer IAG, it does not necessarily mean this trend will continue.
However, IAG’s weak balance sheet, old fleet and high cost base lead me to conclude that the company could struggle to match Wizz’s growth even if the global air travel market rebounds in 2022.
Wizz has a cash-rich balance sheet to support its growth, a lower cost base, a newer fleet and room to expand its low-cost European travel routes.
That is not to say the company will be free of challenges. It could encounter risks such as a rising fuel prices and competition, which would almost certainly impact its growth rate.
Moreover, the domestic European air travel market is highly competitive. IAG has the edge over Wizz on transatlantic routes, which are far more lucrative. If this market recovers rapidly, IAG’s profits may rebound.
Nevertheless, I would avoid IAG shares in 2022 and buy Wizz for my portfolio instead.