International Airlines Group: Cost Execution And Volume Growth

Core Viewpoint - EU airline companies are underperforming in the market, but International Airlines Group (IAG) is seen as a bargain opportunity with a strong brand portfolio and competitive edge [1][7] Group 1: Company Overview - IAG is Europe's third-largest airline group, formed in January 2011, operating brands like British Airways, Iberia, and Aer Lingus [1] - The company operates over 600 aircraft and serves more than 250 destinations across 91 countries, providing a diversified brand portfolio that competes in various market segments [1] Group 2: Financial Performance - IAG's share price has declined by 70% since the pandemic, but the company is viewed as undervalued at current levels [1] - In Q1, IAG reported sales of €6.4 billion with an operating profit of €68 million, indicating a slight beat on core operating profit [2][3] - The passenger load factor is improving towards 85%, with a revenue CAGR of 5% and an EBITDA margin of 15% post-COVID [3] Group 3: Market Dynamics - Aircraft supply issues and maintenance backlogs are expected to constrain long-haul capacity in the medium term, supporting higher yields for network carriers [2] - Long-haul capacity is projected to increase by approximately 12% in Q2 and an additional 10% in Q3, benefiting IAG due to strong transatlantic demand [2] Group 4: Cost Structure and Balance Sheet - IAG has a leaner cost structure with a lower cost per available seat kilometer (CASK) compared to peers, enhancing competitiveness [3] - The company is projected to have a net debt to EBITDA ratio of 1.3x in 2024, indicating a potential resumption of dividend payments [2] Group 5: Valuation - IAG trades at a P/E of 4.2x, significantly lower than peers like Air France-KLM and Deutsche Lufthansa AG, which have normalized P/Es above 5.6x [4] - A blended valuation methodology suggests a target price of €2.5 per share ($5.34 in ADR), indicating a potential upside [4] Group 6: Conclusion - The EU air travel industry is recovering, supported by increased passenger volumes and corporate demand, with IAG's balance sheet now seen as investable [7] - The company is initiated with a buy rating and a projected 28% upside over the next 12 months [7]