Emerging Middle-Class Demand Will Fuel Global Air Expansion

Key Takeaways

• Rapid expansion of the loyalty business and digital transformation are set to drive stronger-than-expected margin and profit growth across the group.
  
• Unique multi-brand network and strong balance sheet position IAG to outperform peers through capturing long-haul demand and pursuing strategic acquisitions.
  
• Rising regulatory costs, labor pressures, and changing travel demand dynamics threaten to compress margins and hinder long-term revenue and earnings growth.

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.

• Analysts broadly agree IAG's loyalty business can drive high-margin growth, but with Avios issuance up 17% and new major partnerships rapidly accelerating, the pace and scale of capital-light, recurring profit expansion could be meaningfully ahead of expectations, supporting much stronger group net margins and earnings growth than the market assumes.
  
• Analyst consensus sees operational efficiencies and customer experience investments as margin drivers, but with IAG's group-wide transformation yielding a 2.9 percentage point operating margin increase in just six months and fleet upgrades accelerating, there is scope for sustained best-in-class margin performance and superior free cash flow well above peer averages.
  
• As international economic integration persists and emerging market middle-class travel accelerates-evidenced by record South Atlantic, Latin American, and Asia-Pacific demand-IAG's unique multi-brand network is positioned to capture outsized long-haul growth, supporting significant revenue outperformance versus global airline peers.
  
• Ongoing industry consolidation and IAG's balance sheet strength create capacity for highly accretive M&A or asset purchases-such as potential participation in the TAP privatization or absorbing distressed carriers-adding incremental top-line and synergy-driven bottom-line upside currently unmodeled by the market.
  
• With substantial investment in digitalization, AI-powered revenue management, and best-in-class on-time performance across all airlines, the group is poised for long-term improvement in per-passenger yield and overall network profitability, translating to a sustained structural uplift in earnings.

International Consolidated Airlines Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on International Consolidated Airlines Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming International Consolidated Airlines Group's revenue will grow by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.4% today to 11.0% in 3 years time.
• The bullish analysts expect earnings to reach €4.2 billion (and earnings per share of €0.91) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, up from 6.7x today. This future PE is greater than the current PE for the GB Airlines industry at 7.6x.
• Analysts expect the number of shares outstanding to decline by 4.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.39%, as per the Simply Wall St company report.

International Consolidated Airlines Group Future Earnings Per Share Growth

Risks

• Intensifying climate regulation and rising sustainable aviation fuel mandates will materially increase operating costs and could suppress long-term passenger demand, putting sustained pressure on net margins and future earnings growth.
  
• Structural decline in business travel driven by remote work adoption and advanced telepresence technology threatens a major source of high-margin revenue, raising uncertainty about IAG's ability to maintain or grow its earnings base over time.
  
• Demographic headwinds and evolving consumer preferences-including aging populations in core European markets and environmental consciousness among younger travelers-pose risks to volume, potentially resulting in weaker revenue growth and long-term demand stagnation.
  
• IAG's continued exposure to legacy labor costs, unionized workforce pressures, and the risk of labor disputes at its core airlines threaten operational disruption and sustained cost inflation, which could erode operating profits and compress net margins.
  
• Industry-wide infrastructure constraints such as limited airport capacity and rising airport fees, alongside the risk that regulatory scrutiny could block scale-building acquisitions, may restrict IAG's ability to expand and limit future revenue growth prospects.

Valuation

• The assumed bullish price target for International Consolidated Airlines Group is £5.48, which represents two standard deviations above the consensus price target of £4.32. 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €38.1 billion, earnings will come to €4.2 billion, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 10.4%.
• Given the current share price of £3.88, the bullish analyst price target of £5.48 is 29.3% 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.