British Airways owner International Consolidated Airlines (LSE: IAG) has been a popular stock this year. On my investment platform, Hargreaves Lansdown, IAG has consistently been one of the most purchased UK shares in 2021.
Should I buy IAG shares for my own portfolio? Let’s take a look at the investment case.
IAG shares: should I buy?
I can see why investors have been piling into IAG shares recently. For a start, IAG is a classic reopening stock. With Covid-19 vaccines being rolled out rapidly, activity in the travel industry is now picking up. There’s a considerable amount of pent-up demand to fly. After a very challenging 15 months or so, the outlook for IAG is definitely improving. City analysts currently expect IAG’s revenue to rise about 33% this year to €10.5bn.
Secondly, IAG’s share price is still well below where it was before Covid-19. Back in February last year, the share price was above 400p. Today, however, it is still under 200p. I have no doubt that the depressed share price is attracting value hunters.
Digging deeper into the investment case, however, there are a few risks that concern me.
The first is the enormous amount of uncertainty that airlines face due to the constantly-changing travel rules. The UK’s decision to move Portugal to its amber list last week is a good example of the ever-changing rules.
This environment is a nightmare for airline operators such as IAG. While there is so much uncertainty, bookings are likely to remain depressed. For IAG, it’s a concern that both Spain and the US are on the amber list as these are two of its biggest markets.
Speaking of bookings, IAG said in its recent first-quarter results that for the second quarter of the year, it is expecting capacity to be just 25% of what it was in 2019. This suggests that a full recovery is a long way off. It’s worth noting that it believes corporate bookings are likely to remain below 2019 for years.
Another concern is that fuel prices are rising. Recently, the price of Brent crude oil rose above $70. Airlines typically hedge their fuel costs so they are not exposed to rising fuel prices in the short term. Still, higher fuel costs are the last thing airlines need while they are operating at such a low capacity. Fuel costs are a large part of an airline’s expenses, meaning that higher oil prices can greatly impact profits.
Finally, I continue to have concerns about the company’s balance sheet. IAG recently advised that at the end of March, it had net debt of €11.5bn, up 18.5% from last year. Since then, it has launched an €800m convertible bond. This substantial pile of debt adds significant risk to the investment case. With air travel likely to remain depressed for at least a few years while Covid-19 is lingering, it could be hard for it to generate enough profit to pay the interest on its debt.
IAG shares: my move now
Weighing everything up, I think the risks outweigh the potential rewards here. All things considered, I think there are much better stocks I could buy today.
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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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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