Skyward Ambitions Amidst Turbulence Efficiency Gains Clash With Competitive Pressures

Key Takeaways

• Focus on expanding core markets and investing in efficient aircraft underpins potential revenue growth and improved margins.
  
• Strong financial position supports shareholder returns and signals confidence in future earnings and premium travel recovery.
  
• Operational challenges, competitive pressures, and geopolitical issues could hinder growth, impact profitability, and limit revenue opportunities for International Consolidated Airlines Group.

Catalysts

Engages in the provision of passenger and cargo transportation services in the United Kingdom, Spain, the United States, and rest of the world.

• IAG's network strategy focuses on expanding core markets and hubs, with new routes and increased frequencies planned for Aer Lingus, Iberia, British Airways, and Vueling, which could drive revenue growth.
  
• The introduction of new, more efficient aircraft is expected to reduce fuel costs and improve margins, positively impacting net margins.
  
• Investments in operational resilience and digital technology, aimed at enhancing on-time performance and customer experience, could lead to higher customer satisfaction and retention, thereby boosting future earnings.
  
• The group's strong balance sheet and cash flow allow for a €350 million share buyback, indicating confidence in future earnings and supporting longer-term EPS growth.
  
• Recovery and growth in premium leisure and business travel demand, primarily in North America and Europe, are seen as key drivers for increasing unit revenue and overall profitability.

International Consolidated Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Consolidated Airlines Group's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.1% today to 8.7% in 3 years time.
• Analysts expect earnings to reach €3.0 billion (and earnings per share of €0.54) by about November 2027, up from €2.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €3.6 billion in earnings, and the most bearish expecting €2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2027 earnings, up from 4.9x today. This future PE is lower than the current PE for the GB Airlines industry at 10.6x.
• Analysts expect the number of shares outstanding to grow by 4.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.47%, as per the Simply Wall St company report.

International Consolidated Airlines Group Future Earnings Per Share Growth

Risks

• The competitive pressure from U.S. carriers on Aer Lingus, coupled with industrial action and Dublin Airport capacity challenges, poses risks that could negatively impact Aer Lingus' revenue and operating profit.
  
• The issues with aircraft and engine reliability, particularly BA's 787 fleet and A380s, may lead to operational disruptions and increased costs, affecting overall earnings and efficiency.
  
• The delayed delivery of new aircraft, such as the 777X, along with capacity management challenges, could hinder BA's growth, potentially impacting future revenue and profit expansion.
  
• Price competition and capacity increases in specific markets like Europe could lead to pressure on yields, affecting overall profitability and margins.
  
• The geopolitical and market-specific issues affecting demand in regions like Asia Pacific and the impact of restrictions on the Russian airspace could limit revenue growth opportunities.

Valuation

• The analysts have a consensus price target of €2.65 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 €4.99, and the most bearish reporting a price target of just €1.67.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €34.9 billion, earnings will come to €3.0 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of €2.38, the analyst's price target of €2.65 is 10.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.