Should I be buying IAG shares today?

Jumbo jet preparing to take off on a runway at sunset

Since I last wrote about British Airways owner IAG (LSE: IAG), the share price has seen an 11% recovery. After a generally positive set of H1 results, I could be tempted into buying the shares in order to capitalise on the potential upside.

IAG shows promise

IAG followed through on its Q1 guidance of achieving profitability in the second quarter. Q2 was, in fact, the group’s first profitable quarter since the start of the pandemic, with an adjusted earnings per share (EPS) of 2.5c.

Metrics H1 2022 H1 2021 Change
Total revenue €9.35bn €1.14bn 720%
Operating profit -€438m -€2.04bn 79%
Adjusted EPS -13.8c -43.7c 68%
Net debt €10.98bn €11.67bn -6%
Net cash €9.19bn €7.94bn 16%
Source: IAG H1 earnings report

It was also pleasing to see revenue per available seat kilometres (ASK) and passenger numbers edge closer to pre-pandemic levels. Aside from that, IAG managed to improve its financial position slightly, reducing its debt by €688m, while receiving positive free cash flow.

Metrics H1 2022 H1 2019 Percentage of 2019 Levels
ASK 118m 163m 72%
Passenger revenue per ASK 6.46c 6.52c 99%
Passengers carried 40m 56m 71%
Passenger load factor 77.8 83.0 94%
Source: IAG H1 earnings report

Therefore, the view of achieving operating profitability by the end of the year is starting to become a realistic possibility. All signs are pointing towards an increasingly promising rest of the year for the FTSE 100 firm.

Striking deals

Apart from the much improved financial performance of the company, IAG also managed to quash fears of future strikes. The company managed to strike a deal with 16,000 workers for a 13% pay rise this year. This should alleviate fears of last-minute flight cancellations, at least for the time being.

Nonetheless, not all is as smooth cruising as it may seem. This is because Heathrow Airport has opted to extend its cap on passenger numbers until the end of October, with no more than 100,000 travellers per day, leading to cancellations of tens of thousands of flights. As Heathrow is the hub of IAG’s most profitable airline, I’m expecting this to impact H2 results.

As a result, CEO Luis Gallego revised the company’s outlook downwards. IAG now expects capacity to hit 78% of 2019 levels, as compared to the previous 80% that IAG had expected. From this, North Atlantic capacity (IAG’s most profitable routes) is now expected to hit 92% of 2019 levels in Q3, compared to the previous guidance of 95%.

Having reservations

While the future outlook for IAG still remains rather promising, I have my reservations regarding its potential upside. Although passenger demand still remains strong, I’m fearful that it’s only a matter of time before sky-high inflation, and a potential recession on the cards, starts hitting consumers harder.

Furthermore, IAG’s long-haul recovery continues to lag that of shorter trips. The continued travel restrictions in large parts of Asia, specifically China, is hindering its growth potential. And with China sticking to its zero-Covid policy, this avenue doesn’t look likely to recover any time soon. Business travel also still continues to lag, only hitting 60% of its pre-pandemic volume. Moreover, as the winter months approach, I’m expecting the number of holiday travellers to start winding down.

Even though IAG shares have the potential to grow plenty, my optimism is hindered by a cloudy economic environment. Overall costs still remain high and, most importantly, the company still has a mountain of debt to pay off, which is expected to increase going into the year end. For that reason, I won’t be investing in IAG shares.

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John Choong 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.