Might we be reaching the Covid end-game sooner than expected? That should be good news for travel companies like International Consolidated Airlines (LSE: IAG). But investors have not repeated their early 2021 optimism in 2022 so far, with the IAG share price down 2% over 12 months. And over the past two years, we’re still looking at a fall of around 75%.
What’s going to happen in 2022? There are factors pulling in both directions, and today I’m looking at what I see as the key ones.
Firstly, the emergence of a new Covid variant is not good news. But then, emergency travel restrictions in response to Omicron were quickly reversed, as it became clear that the far faster transmission rate meant it was already too late.
The future for leisure aviation should hopefully become a lot clearer in the coming months. Passenger capacity at the end of September had still reached only around 43% of 2019 levels. Full-year results are due on 25 February, and the company expected Q4 to achieve around 60% of 2019 capacity. IAG, though, offered that guidance before the Omicron variant arrived.
IAG share price needs passengers
I also see a downside for improving passenger capacity, and it’s all about the levels that flying will get back to. Will the airlines ever regain their 2019 volumes? That alone is far from certain. And if it happens, how long will it take? I suspect progress on passenger volumes in 2022 has the potential to swing the IAG share price in either direction.
Then there’s the bottom line, and the time for IAG to regain profitability seems key. Q3 brought an operating loss, but there was some light. The company reported positive cash flow for the first time since the start of the pandemic. Liquidity improved too, so the dangers of collapse appear to have been passed.
What valuation now?
That brings me to my final issue, and I think it’s the most important. When I examined Rolls-Royce, I spoke of Benjamin Graham’s famous assertion that in the short run, the market is a voting machine. But in the long run, it’s a weighing machine. I saw a shift happening with Rolls, away from short-term investor sentiment (the voting machine) and towards a fundamental revaluation of the company (the weighing machine).
I see the same happening with International Consolidated Airlines. And the outcome of that will surely be what sets the longer-term course for the IAG share price. So where does that leave me, pondering yet again whether to buy IAG for my ISA?
To buy or not to buy?
I avoid airlines as a rule, due to their highly competitive market and lack of any real differentiation. But at the same time, I’ll buy a stock if I see it as fundamentally undervalued, whatever its sector.
But right now, I really can’t get a grip on IAG’s likely fundamental valuation. I think it will take progress in 2022, coupled with the market’s weighing machine, to sort that out. I’m still watching and waiting.