2 reasons why I’m avoiding cheap IAG shares in April!
I’m searching for the best FTSE 100 bargain stocks to buy this month. And International Consolidated Airlines (LSE:IAG) shares have grabbed my attention, the British Airways owner falling 29% in value from February’s record high.
After ‘kicking the tyres’, I’ve decided I’ll steer well clear of the travel giant this ISA season. Here are two major reasons why.
1. Economic gloom
Airlines are highly cyclical companies. When times get tough, luxuries like trips abroad tend to be among the first things to fall when consumers tighten the pursestrings. Business and cargo travel also tends to weaken when economic conditions worsen.
Looking ahead, IAG should be boosted by a (likely) further fall in global interest rates. However, a sharp economic contraction in response to wide-reaching trade tariffs may greatly outweigh any any extra central bank action. Some even believe the chances of a US and UK recession are also sharply rising, two key markets for the company.
IAG’s budget airlines Aer Lingus and Vueling may avoid the worst of the fallout. In fact, demand for their services may pick up if travellers switch to cheaper operators.
But things are largely looking highly uncertain for IAG and the broader travel industry. And especially for transatlantic carriers like British Airways, as alarming comments from rival Virgin Atlantic on Monday (31 March) show.
Chief financial officer Oli Byers said the business enjoyed “very strong trading for the first quarter“. But he added that “we have started to see some signals that US demand has been slowing” over the past few weeks.
2. Falling transatlantic activity
I’m particularly concerned about a sharp cooldown for IAG’s lucrative North American routes. And not just because travellers may switch to cheaper, more local destinations as they feel the pinch.
It’s also due to cultural and political shifts following last November’s election. In other words, ‘Brand USA’ is experiencing the sort of image problems that have sunk Tesla sales in recent weeks (down more than 40% in the European Union in February, for instance).
Early indications suggest the decline in 2025 and beyond could be severe. According to Tourism Economics, inbound travel to the US is tipped to drop 5.5% this year. It had previously been expected to rise 9% from 2024 levels.
Why is this such an issue for IAG? A whopping 30.7% of its capacity (as measured in available seat kilometres (ASKs)) was geared towards North Atlantic routes in 2024.
What’s more, sales growth on these long-haul journeys is considerably higher than elsewhere. Last year, passenger revenue per ASK rose 6.2% in North Atlantic routes. This was double the rate of corresponding growth across the wider group.
Too risky
Following IAG’s recent share price slump, the airline group trades on a forward price-to-earnings (P/E) ratio of 5.5 times. While low compared to the broader FTSE 100, this valuation tellingly reflects the significant and mounting risks the company now faces.
On balance, I’d rather search for other UK value shares to buy.
The post 2 reasons why I’m avoiding cheap IAG shares in April! appeared first on The Motley Fool UK.
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More reading
- At a P/E multiple of 6, is this FTSE 100 stock a no-brainer buy to consider in April?
- FTSE shares: an opportunity to secure generational wealth?
- What’s going on with IAG shares as Heathrow shuts?
- Down 20% since February despite excellent 2024 results, is IAG’s share price set to soar again?
- Where could IAG shares go in the next 12 months? Here’s what the experts say!
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.
