Rising Environmental Costs And Flight Shaming Will Erode Margins

Key Takeaways

• Environmental regulations and declining business travel will put substantial pressure on IAG's margins and profitability for the foreseeable future.
  
• Competitive threats, rising fixed costs, and shifting consumer sentiment are set to weaken core revenues and limit future investment flexibility.
  
• Strong demand for premium travel, digital transformation, fleet modernization, and improved financial stability are driving sustained margin expansion and enhancing long-term 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.

• Intensifying global environmental regulations and ambitious carbon reduction targets are set to sharply increase operating costs for IAG. As governments introduce higher emissions standards, carbon taxes, and sustainable aviation fuel mandates in Europe and beyond, IAG will face significant margin pressure and be forced into costly, large-scale fleet upgrades that will constrain both earnings growth and free cash flow for years.
  
• The persistent, structural decline in premium business travel-exacerbated by the widespread adoption of remote work, video conferencing, and evolving corporate travel policies-will erode one of IAG's most profitable revenue streams, leading to lower average revenue per passenger and continued margin compression despite short-term strength in premium cabins.
  
• IAG's exposure to changing consumer sentiment, especially in Europe where anti-tourism protests and growing environmental awareness are driving more flight shaming and calls for mobility restrictions, threatens to structurally reduce discretionary travel demand on core short-haul and leisure routes, depressing long-term passenger volumes and revenue.
  
• The heavy reliance on mature and highly competitive European and transatlantic markets leaves IAG particularly vulnerable to future capacity expansions from low-cost carriers and Middle Eastern airlines, which could force down fares and load factors, undermining yield and putting net margins under prolonged pressure.
  
• Deferred aircraft renewal combined with high legacy labor costs and large pension liabilities will demand substantial capital expenditures and limit cost flexibility; as these payments rise, future depreciation, interest expense, and fixed costs will reduce net profit and restrict the company's ability to invest for growth or return capital to shareholders.

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 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.9% today to 8.4% in 3 years time.
• The bearish analysts expect earnings to reach €3.0 billion (and earnings per share of €0.61) by about July 2028, up from €2.9 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 6.0x on those 2028 earnings, down from 7.0x today. This future PE is lower than the current PE for the GB Airlines industry at 7.3x.
• Analysts expect the number of shares outstanding to decline by 1.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.49%, as per the Simply Wall St company report.

International Consolidated Airlines Group Future Earnings Per Share Growth

Risks

• Strong secular growth trends such as robust international travel demand, expanding global mobility, and the rise of middle classes in emerging markets are fueling IAG's revenue growth, as shown by particularly high performance on North and South Atlantic long-haul routes.
  
• The premium cabin segment continues to outperform, with resilient demand from business and high-yield leisure travelers supporting higher average revenue per passenger and improved operating margins.
  
• Ongoing digitalization, technology investment, and successful delivery of group-wide transformation programs are enabling higher operational efficiency, cost reduction, and sustained world-class margin expansion, positively impacting long-term earnings.
  
• Strategic fleet modernization and recent large orders for new, fuel-efficient aircraft signal confidence in ongoing network optimization and enable cost savings, which is likely to drive margin and profit growth in the long run.
  
• Strengthened financial foundations, such as rapidly reduced net and gross leverage, investment grade upgrades from rating agencies, and a commitment to sustainable dividends and share buybacks, enhance shareholder returns and provide a buffer for future revenue and earnings stability.

Valuation

• The assumed bearish price target for International Consolidated Airlines Group is £2.62, which represents two standard deviations below the consensus price target of £4.07. 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 £5.47, and the most bearish reporting a price target of just £2.37.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €35.6 billion, earnings will come to €3.0 billion, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 10.5%.
• Given the current share price of £3.77, the bearish analyst price target of £2.62 is 43.7% lower.
• 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.