Mounting Environmental Fees And Aging Demographics Will Undermine Airline Outlook

Key Takeaways

• Rising environmental costs, increased competition, and regulatory hurdles threaten profitability and pressure IAG's cost structure and pricing power.
  
• Structural demand headwinds and fleet renewal challenges risk lowering earnings power and free cash flow compared to key competitors.
  
• Robust demand, cost discipline, digital upgrades, fleet renewal, and strong cash flow position the company for profitable growth, operational resilience, and enhanced shareholder value.

Catalysts

Engages in the provision of passenger and cargo transportation services in the North Atlantic, Latin America, the Caribbean, Europe, Africa, the Middle East, South Asia, the Asia Pacific, and internationally.

• Escalating requirements for sustainable aviation fuel, combined with new taxes and stricter environmental mandates, are poised to raise IAG's long-term operating costs significantly while making it difficult to pass these costs through to price-sensitive leisure travelers, which threatens net margins and revenue growth.
  
• The ongoing demographic shift toward an aging population coupled with the normalization of remote work is likely to result in persistently lower structural demand, especially for high-yield business travel, putting downward pressure on IAG's load factors and reducing recurrent earnings power.
  
• Heightened regulatory and geopolitical barriers-including volatility from protectionist policies and conflicts-risk restricting IAG's access to lucrative international routes and causing sudden spikes in compliance and operational costs, which may erode both revenue and operating margins.
  
• IAG's heavy reliance on North Atlantic routes exposes the group to intensifying competition both from US and European rivals as well as ultra-low-cost carriers, limiting pricing power and compressing yields, while emerging US and EU taxes and regulatory fees further threaten profitability.
  
• Relative to key peers, IAG's slower pace of fleet renewal and a transitional period with a mixed fleet at Vueling are likely to result in higher fuel and maintenance expenses over the coming years, worsening its cost structure and reducing free cash flow, especially as industry-wide technological disruption accelerates.

International Consolidated Airlines Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on International Consolidated Airlines Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming International Consolidated Airlines Group's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.4% today to 9.9% in 3 years time.
• The bearish analysts expect earnings to reach €3.4 billion (and earnings per share of €0.67) by about August 2028, up from €3.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2028 earnings, down from 6.7x today. This future PE is lower than the current PE for the GB Airlines industry at 7.5x.
• Analysts expect the number of shares outstanding to decline by 5.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.54%, as per the Simply Wall St company report.

International Consolidated Airlines Group Future Earnings Per Share Growth

Risks

• Sustained growth in global air travel demand, particularly in core markets such as North Atlantic, Latin America, and emerging regions, is driving increases in both capacity and yields, which could support higher passenger revenues and positive long-term revenue trends.
  
• The company is realizing higher margins and robust earnings growth from ongoing transformation initiatives, synergy capture across its airline brands, and strong execution on cost controls, which could underpin improved operating margins and net earnings.
  
• Significant investments in digital infrastructure, revenue management systems, and customer personalization-alongside successful upgrades to operations and technology-are supporting efficiency gains and enhancing customer experience, which may enable margin expansion and improved customer retention.
  
• The commitment to modern and fuel-efficient fleet renewal, alongside leadership in sustainable aviation fuel procurement and environmental initiatives, is likely to deliver lower long-term fuel and maintenance costs and strengthen regulatory compliance, supporting both cost structure and future profitability.
  
• Strong free cash flow generation, a healthy balance sheet with net leverage well below target, and substantial shareholder returns through dividends and buybacks provide financial flexibility and resilience, supporting continued investment while protecting net margins and underpinning the potential for further share price appreciation.

Valuation

• The assumed bearish price target for International Consolidated Airlines Group is £3.45, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of International Consolidated Airlines Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.83, and the most bearish reporting a price target of just £3.45.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €34.7 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 10.5%.
• Given the current share price of £3.88, the bearish analyst price target of £3.45 is 12.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.