The IAG share price is down 15%. Should I buy?

Young couple going for holidays with colorful suitcases

Despite a positive Q1 trading update, the IAG (LSE: IAG) share price is down 15% this year. With tourism making a comeback this summer, the current International Consolidated Airlines Group share price may seem like a bargain. However, there’s more than meets the eye.

Up and away?

I would have expected the IAG share price to lift off after it reported a generally positive set of Q1 results last month. The group managed to recover a substantial amount of its losses to €731m from €1.1bn a year ago. Total revenue before exceptional items was up by a whopping 485% year on year (Y/Y).

In addition to that, total passenger numbers saw an increase to 14.4m, alongside a 72% load factor (A measure of how full a plane is). Most importantly, IAG expects its operating results to be profitable from Q2 onwards, which is great news for investors. So, why’s the stock stalling then?

Airline British Airways Iberia Aer Lingus Vueling Level
Passenger numbers (‘000s) 5,294 3,846 1,149 4,034 54
Percentage 36.8% 26.8% 8.0% 28.0% 0.4%
Source: IAG Q1 2022 Traffic Stats

Sky’s not the limit

The negative sentiment surrounding IAG shares can be attributed to passengers being warned of major delays this week. Workers are carrying out a ballot over a potential pay strike. Check-in staff at Heathrow airport said that the company has refused to reverse a 10% pay cut imposed on them during the pandemic. Meanwhile, management pay has been restored to pre-pandemic levels.

Trade Unite, the trade union representing these staff disclosed that the industrial action ballot covers around 500 staff, and is expected to close on 27 June. An unfavourable settlement would most probably lead to strikes in July, which is IAG’s busiest period of the year. With a bottleneck of queues already building up outside several UK airports, this could very well hinder IAG’s route to profitability in the short to medium-term.

To make matters worse, the group is also facing shareholder pressure over a decision to decrease CEO Luis Gallego’s share compensation. IAG’s annual general meeting is fast approaching, and shareholders are not very keen on awarding its chief executive after the company posted enormous losses during the pandemic.

Flying blind

Nonetheless, do the positive figures from the group’s Q1 report make IAG shares investible for me? I think not. The conglomerate’s balance sheet still remains undesirable, as its staggering amount of debt is not well covered by operating cash flow. Despite IAG reducing its debt levels by 0.6% last quarter, a potential slowdown in customers may undo its recovery.

I expect travel tailwinds to slow down in the coming quarters as economic headwinds start to take shape. Inflation in April came in at 9%, and with further interest rate hikes expected, I am doubtful that passenger numbers will continue recovering at the same pace.

Although the lifting of lockdowns in China should see passenger numbers rise in Asia, oil prices have also risen. Oil is now hovering around $120 per barrel and will definitely have a negative impact on IAG’s bottom line. This sparks fresh concerns as to whether the company’s guidance of achieving operating profitability by Q2 is still a realistic possibility. As such, I will not be looking to invest in the IAG shares. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more financial security.

The post The IAG share price is down 15%. Should I buy? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned at the time of writing. 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.