British Airways Owner Has a Long Runway for Postpandemic Growth
It’s been a difficult start to the year for airlines all over the world as the disruption from the Omicron variant has started to hit earnings.
For investors navigating an airline sector looking to recover from the pandemic, the flight path of International Consolidated Airlines Group (ticker: IAG) has been particularly tumultuous in recent months, but it suggests the stock has room to grow.
Shares in the British Airways owner surged 25% in the space of 10 days in September after the White House confirmed it would lift travel restrictions on the United Kingdom and continental Europe, signaling the return of trans-Atlantic travel from November. But the recovery failed to take hold as the Omicron variant entered the fray. IAG remains 21% below its high of early October.
Deutsche Bank analyst Jaime Rowbotham has a Buy rating on the stock with a target price of 2.20 pounds sterling ($2.96), implying a 49% upside. The company has yet to see the benefit of the reopening of the trans-Atlantic corridor, he says.
Citi analysts, led by Sathish Sivakumar, see the company as “the most solvent and sensible way” of playing the North Atlantic recovery over the next 12 months.
The long-haul sector isn’t the same as it was prepandemic, with Norwegian Air and Thomas Cook both exiting the market since. The pair accounted for 11% of seats in the U.K.-U.S. market in 2019, Sivakumar says, and IAG would be the main beneficiary of their exits.
IAG’s lack of exposure to the corporate travel market—just 13% of group revenue—is another reason to like the stock, the Citi analysts say, particularly as business travel looks set to recover more slowly. Sivakumar also has a target price of £2.20 and a Buy rating.
The company, which also owns Spanish carrier Iberia, Irish airline Aer Lingus, and low-cost airlines Vueling and Level, is expected to post revenue of £15.9 billion for 2022, according to FactSet.
That would be a significant improvement on revenue of £6.8 billion in 2020, and the estimated £7.04 billion in 2021, but still some way below 2019’s £21.9 billion.
Analysts covering the stock are pretty bullish, with an average target price of £1.98, implying a 34% upside to Monday’s closing price, according to FactSet.
There is still the Omicron impact to consider. In November, just days before the emergence of the variant, CEO Luis Gallego said he expected North Atlantic routes to reach full capacity by summer 2022, with bookings already close to 100% of 2019 levels.
Rowbotham says he expects that outlook for trans-Atlantic travel to “remain broadly intact,” when the company reports fourth quarter earnings on Feb. 25.
That is not to say IAG won’t feel any impact. Of the major U.S. airlines reporting so far, Delta Air Lines (DAL), United Airlines Holdings (UAL), and American Airlines Group (AAL) each see revenue in the first quarter falling more than 20% from 2019 levels, largely due to Omicron. But they all offered optimism over the months ahead, particularly headed into the summer.
When it comes to IAG, though, Liberum analyst Gerald Khoo noted that renewed travel restrictions “have not yet impacted key long-haul routes” and said he remained optimistic that summer 2022 could still offer a more normal travel environment.
He said long-term structural winners have typically seen accelerated gains following periods of industry turmoil. IAG is one such winner “with an efficient cost base and a balance sheet unburdened by state aid.”
As travelers return, IAG’s stock could have a longer runway for gains.