3 pros and 3 cons of buying IAG shares now

An airplane on a runway

International Consolidated Airlines Group (LSE:IAG) has been in the news recently. Via the British Airways subsidiary, issues with cancelled flights and workers pay have been prominent. This has led me to reconsider whether I should buy IAG shares at the moment. Here are the risks and potential rewards that I can see.

Starting with the risks

Before I get ahead of myself with regards to the potential upside, let’s consider the issues. The first one is cost base increases due to inflation.

This has been a problem that has caused the business to raise BA workers’ pay by 13% by the end of 2022. Although this is broadly in line with inflation, it’s a steep increase to business costs that now have to be factored in, reducing profitability.

Another risk is the relationship with the union, Unite. As we’ve seen from strikes in the rail sector recently, unions have the potential to cause large-scale disruption. A unionised workforce isn’t a bad thing in itself. But if the IAG management team and the union clash in the future, this could mean ongoing business disruption.

A third problem I see is regarding passenger capacity. I understand that BA is just one of the brands owned by the company, but it’s still an issue when Heathrow (the operating base for BA) restricts capacity to 100,000 per day. This is causing flight cancellations, which is ultimately leading to lost revenue for IAG and reputational damage.

Upside potential for IAG shares

When looking at costs at a group level, there’s a benefit to be head from the lower jet fuel cost. Even though oil is more expensive versus a year ago, jet fuel is down 5.4% over the past month. If this trend lower continues, IAG will be able to operate planes at a lower overall cost.

Recent H1 results also offered some cheer. Even though the business posted an operating loss for the six months of €438m, it was significantly better than the loss of over €2bn from H1 2021. Revenue was also up drastically, showing me that the trend is definitely improving as we come out the other side of the pandemic.

The final potential reward for me lies in the current valuation of the business. At 119p, the market capitalisation is £5.85bn. Yet the enterprise value sits at £15.35bn. This is an alternative valuation metric that I like to use.

The enterprise value include elements such as cash and debt. Given the current figure, I think it’s supportive of the IAG share price moving higher in the long term as investors better appreciate the value of the business.

In the short term, I think the risks outweigh the good news, so I feel the share price could fall further. However, I have it on my watchlist, and if it falls closer to 100p then I’ll buy. I think that long-term value is clearly there.

The post 3 pros and 3 cons of buying IAG shares now appeared first on The Motley Fool UK.

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Jon Smith 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.