British Airways And Affiliates Will Invest In New Aircraft And Technology To Improve Customer Experience

Key Takeaways

• IAG strengthens core markets with expanded routes and improves service efficiency, boosting revenue and margins.
  
• Focus on IAG Loyalty growth and shareholder returns drives profitability through high-margin business expansion and capital returns.
  
• Increasing transatlantic competition, capacity constraints, and geopolitical risks may pressure revenue and margins, despite uncertainties in business travel recovery.

Catalysts

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

• IAG is strengthening its core markets and hubs by adding destinations, increasing frequencies, and improving schedules, which can boost revenue through better network connectivity and increased passenger numbers.
  
• The company plans to grow its asset-light, higher-margin IAG Loyalty business, which is expected to drive earnings growth due to its high profitability and expansion in value creation methods.
  
• British Airways and other airlines within IAG are enhancing customer propositions and operational efficiencies, projected to increase net margins by improving service quality and reducing operational costs.
  
• IAG's strategy includes continuing investment in new aircraft and technology to improve customer experiences and operational resilience, enhancing revenue and operational efficiency.
  
• The company is focused on free cash flow generation and shareholder returns through buyback programs and dividends, which can lead to higher earnings per share as excess capital is returned to shareholders.

International Consolidated Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Consolidated Airlines Group's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 9.9% in 3 years time.
• Analysts expect earnings to reach €3.6 billion (and earnings per share of €0.72) by about March 2028, up from €2.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from 6.1x today. This future PE is greater than the current PE for the GB Airlines industry at 6.5x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

International Consolidated Airlines Group Future Earnings Per Share Growth

Risks

• The increasing competition, particularly on transatlantic routes, could put pressure on pricing and impact revenue growth for the company.
  
• The capacity growth limitations, due to supply chain constraints and aircraft delivery delays, may restrict the ability to expand routes and frequency, impacting potential revenue growth.
  
• Potential foreign exchange headwinds and increased operating costs, such as employee and supplier costs, might narrow net margins despite revenue growth.
  
• Uncertainty in business travel demand recovery, particularly in certain sectors, could affect revenue streams that are heavily reliant on business class sales.
  
• Regulatory and geopolitical risks, such as the outcome of the Russia-Ukraine conflict impacting airspace availability, could create operational challenges and impact revenue and costs.

Valuation

• The analysts have a consensus price target of £3.93 for International Consolidated Airlines Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.09, and the most bearish reporting a price target of just £1.72.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €36.6 billion, earnings will come to €3.6 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of £2.92, the analyst price target of £3.93 is 25.8% higher.
  
• 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.