The IAG share price dropped 10% in October. Should I buy now?

British Airways

October has been a pretty good month for UK stocks. Since September, the FTSE 100 index has gained over 150 points (+2.1%) to close at 7,237.57 points on Friday. But the month of Halloween has been scary for shareholders of International Consolidated Airlines Group (LSE: IAG). Sadly, the IAG share price has been one of the Footsie’s worst performers this month.

The share price soars and slumps

The IAG share price closed at 88.69p on 30 October 2020. But then came ‘Vaccine Monday’ (7 November 2020), with news of highly effective Covid-19 vaccines. As a result, IAG shares took off like one of the group’s soaring aircraft. By 16 March, the stock hit an intra-day high of 222.1p, more than doubling (+150.4%) since last Halloween.

Alas, over the next six months, the shares went into steep decline. On 15 September, IAG closed at 137.12p, having lost almost 38.3% of its value in half a year. But then the stock rebounded once more, ending September at 178.5p.

The stock slides in October

The October curse argues that this month has historically been a particularly bad one for stock markets. And that was certainly the case for shares in the operator of British Airways, Iberia and Aer Lingus. On Friday, the IAG share price closed at 162.17p, down 16.33p (-9.1%) since 30 September. This makes IAG one of the worst performers in the FTSE 100 index during October. After this share slide, the group’s market value has declined to £8.1bn. So what went wrong this month?

Airlines’ problems are stacking up

The first problem for IAG and its share price is rising Covid-19 infection rates. As we head towards the winter months, countries may be forced to reimpose travel restrictions that were eased earlier this year. This could restrict international air travel, choking off airlines’ recent return to growth.

Second, IAG faces a couple of problems closer to home. Heathrow Airport has won approval from the Civil Aviation Authority (CAA) to lift the cap on passenger charges by more than half (up to 56%) for 2022-27. These extra costs will force airlines to raise ticket prices, making flying even more expensive. In addition, hikes to Air Passenger Duty (APD) in this week’s Budget will pile yet more costs onto passengers. For long-haul flights of 5,500 miles and more, APD could rise by as much as £91 per economy ticket rather than the £84 originally scheduled. Ouch.

Third, and to top it all off, skyrocketing fuel prices could further damage airlines’ profitability in 2021-22. A barrel of Brent Crude oil costs $83.72 today, more than doubling (+122.5) in a year. Yikes.

Would I buy at the current IAG share price?

At present, I don’t own IAG stock. But would I buy after the IAG share price’s latest decline? As a veteran value investor, I’m going to have to say no. I prefer to buy stocks with low earnings ratings and high dividend yields. For me, IAG is the exact opposite: a potential growth share facing multiple business obstacles. I would have bought the stock at 137.25p on 16 September, but IAG now has higher hurdles to clear. Also, its net debt of €12.1bn (£10.2bn) is greater than its current market value. Of course, I could be wrong: winning the war on coronavirus could breathe new life into airline stocks. But for now, I’ll steer well clear of IAG!

The post The IAG share price dropped 10% in October. Should I buy now? appeared first on The Motley Fool UK.

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More reading

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  • This is why I’ve changed my mind on IAG’s share price!
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  • IAG (LON:IAG) tumbles as airport fees are set to rise

Cliffdarcy 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.