The IAG (LSE:IAG) share price slumped further recently after its Q1 trading update left investors disappointed. However, it wasn’t all bad news for the conglomerate, which owns British Airways and Iberia. The group expects to return to profitability in Q2, which is excellent for shareholders, although I’m keen to see that actualised.
Having traded above 400p a share before the pandemic, IAG shares are now valued at just 120p. In fact, the shares are actually trading at levels near their lows during the first lockdown. Despite this, the aviation industry is looking a lot more rosy now than it did two years ago. So, is now the time to buy IAG shares?
Why has the share price fallen?
The pandemic hit passenger airlines hard. Covid-19 saw a significant drop in the demand for passenger flights, linked to both the pandemic itself and the travel restrictions introduced. IAG noted that changing travel restrictions, often with no or very short notice, created uncertainty for customers. As a result of the significantly reduced flying programme, many aircrafts had to be temporarily grounded, with some retired early.
The pandemic also forced the firm to take on more debt. The most recent report put net debt at €11.6bn, while the cost of sustaining borrowings totalled €233m in the first quarter alone. This may prove a huge drag on the balance sheet in the long run.
Recent performance
This year is projected to be a much better year for the aviation industry and there were signs of improvement in IAG’s Q1 update. IAG reported an operating loss for the first quarter €731m, down from a loss of €1,077m during the same period in 2021.
However, some metrics were more positive and demonstrated that the business is getting back to normal. Available seat kilometres (ASK), which captures the total flight passenger capacity of an airline in kilometres, increased to 49,080m, up from just 14,796m one year ago. This meant that passenger capacity in Q1 was 65% of 2019 capacity, up from 59% in the fourth quarter of 2021.
There were no material signs of impact from the war in Ukraine.
Prospects
IAG is expecting to return to profitability in Q2 of 2022, and that’s excellent news. The business said that current passenger capacity plans for the remainder of 2022 were positive too. Its expectations are for around 80% of 2019 capacity in the second quarter, 85% in the third quarter, and 90% in the fourth quarter. Full-year capacity is projected to be around 80% of 2019, with the North Atlantic close to full capacity by quarter three.
However, there are certainly some headwinds. For one, Covid-19 is still impacting staffing and the business has had to cancel flights because of absent staff. The rising price of jet fuel may begin to eat into future profit margins while inflation may start to dampen demand.
Should I buy?
I’ve already bought IAG shares and I would buy more. I do have concerns about debt, but I believe there’s still capacity to service debt and return to previous levels of profitability. I don’t see IAG reaching 400p a share anytime soon, but I do think there’s possibility for long-term growth here.