Image source: Rolls-Royce plc
International Consolidated Airlines stock, or IAG (LSE:IAG) shares, fell around 2% in early trading today (21 March). This underscores concerns about the significant impact of Heathrow’s day-long closure, as British Airways, a key subsidiary of IAG, operates its primary hub at the airport.
A closer look
Heathrow Airport, the UK’s busiest — and the world’s fourth-busiest — airport has been forced to close for the entire day today. This follows a major fire at the North Hyde electrical substation in Hayes, west London, located approximately 1.5 miles from the airport. The fire, which broke out late Thursday night, caused a significant power outage, prompting the airport to suspend operations until at least midnight on Friday.
Over 1,350 flights have been disrupted, with many diverted to Gatwick, Paris Charles de Gaulle, and Shannon Airport in Ireland. Around 16,000 homes have been left without power, and residents have been advised to keep windows and doors closed due to thick smoke.
The closure has had immediate financial repercussions for IAG, which is also the parent company of Iberia, Vueling, Aer Lingus, LEVEL, IAG Loyalty and IAG Cargo. Heathrow is BA’s primary hub, and as the most active airline at the airport, it operates hundreds of daily flights.
With Heathrow handling over 83.9m passengers annually and a plane taking off or landing every 45 seconds, the disruption is significant. Analysts estimate that the cost of compensation and operational delays could impact IAG’s earnings by 1%-3% in 2025. The incident highlights Heathrow’s critical role in global air travel and the ripple effects of such disruptions on major airlines.
A pullback opportunity?
Over the past 12 months, IAG shares have surged by 79%. This was driven by a combination of resilient travel demand, strategic fuel cost management, and improved investor sentiment. The airline group capitalised on the post-pandemic travel boom. In Q3 2024, results showed a 7.9% year-on-year revenue increase and a 15.4% jump in operating profit. IAG’s disciplined capacity management, aligning seating capacity with demand, has supported pricing power, even amid economic challenges.
Cost management is one factor in IAG’s success. This includes its fuel hedging strategy, which mitigated volatility as Brent crude prices. By locking in lower fuel costs for up to two years, IAG is well positioned to weather fuel price volatility but also benefit if fuel prices stabilise at lower levels. IAG’s earnings could jump by 15%-20%, if fuel prices stabilise around $70-75/barrel.
Despite the rally, IAG remains undervalued compared to US peers, trading at just 5.5 times forward earnings. With a price-to-earnings-to-growth (PEG) ratio below one and expected earnings growth in the high single digits, the stock appears cheap. Additionally, IAG’s strong cash flow supports debt reduction and its dominant transatlantic market position, further enhancing its appeal.
However risks remain, including fuel price volatility, geopolitical tensions over Russian airspace, and a stagnating UK economy. Moreover, higher National Insurance Contributions and rising wages will likely put pressure on margins. Landing fees are also increasing.
I’ve recently been reluctant to add to my IAG position at the higher share price. But this recent pullback could be an opportunity. I’m going to explore it more closely before making a decision.
