Will IAG share price continue to fly after ‘strong’ H1 earnings?

IAG’s share price has flown high in 2023 as leisure travel is predicted to near pre-pandemic levels. The British Airways and Aer Lingus owner flew into profit in the first half of the year, reversing a previous loss. A pay deal with British Airways staff should help minimise operational disruption this year, but there are still some clouds on the horizon.

• IAG’s share price up 14% in the first half of the year, 35% year-to-date.
• Operating profits land at €1.26bn, reversing a €446m loss.
• British Airways workers accept 13.1% hike in pay.

IAG’s [IAG.L] share price has flown in 2023. Year-to-date, the stock is up over 35%, lifted by a return in commercial leisure travel after the pandemic all but decimated the industry.

Proof that demand had returned came in July when the group landed “strong profits” for the first half of the year. Operating profits landed at €1.26bn, reversing a €446m loss in the same period last year, with IAG saying a recovery in leisure travel had boosted profits.

IAG shares up after Q2 earnings beat

IAG’s share price is up 14% over the past three months, fuelled by the bumper earnings haul. For the second quarter (Q2), profits came in at €1.25bn, up from €295m for the same period last year, beating analysts’ expectations. This included a record quarterly operating profit for Iberia of €397m.

Higher ticket prices didn’t seem to impact demand as IAG hiked fares by 9.5% to offset a 5.5% increase in fuel costs.

IAG CEO Luis Gallego said that “strong profits” had helped the company reduce debt and invest in its customers. Net debt stood at €7.6bn at the end of Q2, down from €10.4bn at the end of last year.

“Customer demand remains strong across the Group, particularly for leisure travel, with around 80% of passenger revenue for Q3 already booked. And our airlines have put in place plans to support operations during the busy summer period,” said Gallego.

IAG share price forecasts

Barclays reaffirmed its ‘buy’ rating on IAG shares following the results, upping its share price target from 230p to 245p.

Bank of America Merrill Lynch was even more bullish, hiking its price target from 240p to 260p — a 55% upside on Friday’s close of 168p. The analysts noted that IAG Q2 profits beat its own forecast by 28% and the consensus forecast by 40%, adding that the earnings recovery had been “faster” than expected.

The analysts pointed out that IAG management said there was no sign of demand weakness in Q3 and capacity levels would near 2019 levels. For the full year, Bank of America revised its earnings outlook on IAG up 26% to €3.3bn.

"IAG is well-placed to return to its pre-pandemic EBIT margin of 12-14% given its track record of cost control, in our view. We reiterate our ‘buy’," said the analysts.

The IAG share price has a 12-month median price target of 207.27p from analysts covering the stock. Hitting this would represent 23.4% upside on Friday’s close.

IAG adds aircraft to meet demand

IAG has recovered strongly after the pandemic decimated the airline industry. Net debt is down, profits are up and planes are once again back in the skies. Expectations are that full-year 2023 capacity will be approximately 97% of pre-COVID-19 levels, subject to disruption.

To keep up with demand, IAG has adjusted exercised options for six Boeing 787-10s and one Airbus A350-900 to increase its long-haul capacity. The aircraft will be delivered between 2025 and 2026.

“These latest generation aircraft will contribute to restoring capacity to pre-pandemic levels,” said Luis Gallego.

Clouds on the horizon for IAG shares?

For all the good news, there are some clouds on the horizon. IAG noted that weather-related cancellations at British Airways were up 200% in the first half of the year, with the Northern European bases of Heathrow, Gatwick and Dublin experiencing significant operational issues.

Gallego said that it would take lessons from Iberia to improve punctuality across the board, including improvements to the supply chain and use of wet lease aircraft. And while leisure travel has so far been strong, IAG reported that British Airways had seen a recovery in corporate travel level off.

In its Q2 earnings, IAG said it was “mindful of wider uncertainties” that might affect its full-year targets. These uncertainties include geopolitical and macroeconomic volatility on fuel prices and customer confidence, such as the cost-of-living crisis.

The company said operational issues, such as strikes, could also knock earnings targets off course. Some good news came on Friday after British Airways staff voted overwhelmingly to accept a 13.1% pay rise and £1,000 one-off payment.

The deal reverses British Airways’ controversial decision to fire and rehire staff for less pay during the pandemic. It should also hopefully offset the chances of further strike action this year. IAG’s share price was up 2% following the announcement.