I have mixed opinions about the IAG (LSE: IAG) share price. I think the stock looks cheap, compared to its trading history. However, this ignores the fact that the business has changed significantly over the past two years.
The pandemic has slammed profits and revenues, and the company has taken on a vast amount of debt to try and survive the crisis.
However, as we begin to move on from the pandemic, I think the company does have potential. But until there is concrete progress on the recovery, it will remain a speculative investment.
Nevertheless, here is one significant factor that I believe will justify a substantial re-rating of the stock.
IAG share price potential
Unlike most of its UK-listed peers, IAG, which owns the British Airways brand, relies heavily on long-haul travel routes. By comparison, Wizz and easyJet are short-haul, low-cost carriers.
These are two completely different business models. As such, it would be misleading to compare them. IAG is also a bigger, more diversified business. Its stable of airline brands gives the group a foothold in many markets around the world. This is its real competitive advantage.
The group’s brands, which also include Iberia and Aer Lingus alongside BA, give it an internationally diversified portfolio. Unfortunately, this has also has been a bit of a thorn in the company’s side over the past two years.
International travel bans have gutted long-haul travel. As countries continue to experiment with travel restrictions, the long-haul market has continued to suffer, even though the short-haul market in Europe has rebounded.
The jewel in the company’s crown is its route linking its London Heathrow hub and New York John F Kennedy International Airport. This is the most profitable airline route on the planet.
During the past two years, travel bans and restrictions have constrained activity on this route. However, following the lifting of the US travel ban towards the end of last year, it looks like activity on this route could recover over the next 12 months.
This is the catalyst I believe could send the IAG share price significantly higher. When the company starts to see a significant uptick in activity on the London/New York/London routes, it could signify that the global long-haul travel industry as well on the way to recovery.
This could help improve investor sentiment and, more importantly, will generate much-needed cash flow for the enterprise to reduce debt.
Despite the potential, some significant headwinds could hold back IAG’s recovery. These include the potential for another variant of coronavirus, which may shut down the global aviation industry once again. Rising fuel prices could hit profit margins, and inflation may hurt consumer demand.
Still, despite these challenges, I would be happy to buy IAG as a speculative investment with the potential for an upgrade when activity on the transatlantic route recovers.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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