The IAG (LON: IAG) share price has continued to display high volatility over recent months. Indeed, it declined by around 30% within a four-week period in November as the Omicron variant of Covid-19 caused significant uncertainty regarding its near-term prospects.
Since then, the British Airways owner’s shares have staged a partial recovery. They now trade close to a three-month high as concerns about the Omicron variant have subsided. However, their performance is likely to remain closely aligned to the path taken by the pandemic because of its direct impact on demand for global air travel.
An improving performance
Encouragingly, IAG’s latest trading update covering the quarter to 30 September 2021 showed a significant increase in passenger capacity. Indeed, it rose from 22% of 2019 levels in the second quarter to around 43% of levels from two years ago in the third quarter, as travel restrictions in some of its destinations eased.
Clearly, IAG’s expectation of a 60% passenger capacity figure for the fourth quarter is less likely to be met following the return of travel restrictions due to the emergence of Omicron. But a further increase in passenger capacity seems likely over the medium term as the global vaccination programme leads to a gradual abatement of travel restrictions. This could create improved trading conditions that act as a catalyst on the firm’s financial performance.
A long-term recovery opportunity
The company’s financial position indicates that it has the means to survive further challenges for the airline sector. For example, at the end of September 2021 IAG had total liquidity of around £9bn. This was up from a figure of around £6.8bn at the end of 2020. This suggests it can absorb further losses in the short run should passenger capacity remain substantially lower than its 2019 levels while the pandemic continues.
Clearly, the timing of a full return of passenger capacity and demand is a known-unknown. Factors such as the rising popularity of video calls across businesses during the pandemic, concerns about the environmental impact of air travel and rising inflation that could squeeze consumer discretionary incomes may weigh on the sector’s performance over the coming years. In the meantime, a higher oil price may inhibit profitability for airlines.
Broad-based growth opportunities
However, with the global economy forecast to grow at an annualised rate of 4.1% in the next two years, according to the IMF, the operating environment for IAG and its peers may significantly improve. The firm’s diverse business model relative to peers, which includes a wide range of short-haul and long-haul destinations across different price points, could mean it is in a relatively strong position to capitalise on the recovery opportunities within the airline sector.
Between now and then, further share price volatility is very likely. Indeed, its full-year results are due to be released on Friday, which may impact on investor sentiment. But with a relatively solid financial position, a diverse business model and a likely long-term recovery in demand, the firm appears to offer an attractive risk/reward opportunity.
