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The IAG (LSE:IAG) share price is down 35% from its highs. It’s a phenomenal drop from one of the best rated stocks on the FTSE 100. So, what’s behind the sell-off? Well, perhaps unsurprisingly, it’s got a lot to do with tariffs.
Trump compounds Heathrow challenges
IAG was heavily impacted by the closure of Heathrow Airport for a full day after a fire broke out at an electrical substation. The fire, which disrupted over 1,300 flights, also caused severe scheduling challenges in the following days. British Airways, owned by IAG, was worst hit, with nearly half of the affected flights.
The disruptions have led to immediate financial impacts. That means compensation costs projected to reduce IAG’s 2025 earnings by up to 3%. These operational setbacks come amid strong transatlantic travel demand that had previously bolstered its profitability forecasts.
Adding to these challenges are Donald Trump’s tariffs — be they 10% or much higher. The US is the UK’s largest export partner and these tariffs make British goods more expensive in the US. They reduce demand and threaten UK economic growth. Retaliatory measures could further distort trade flows and depress global demand.
The tariffs’ impact extends beyond trade too. Economists warn they could push the US into recession, as reflected in Delta Air Lines’s recessionary outlook. Its CEO said on 9 April that the business was “on a recession footing”. Recessions typically mean less demand for air travel.
Falling fuel prices could push IAG higher
The recent decline in jet fuel prices, from $2.31 a gallon on 2 April to $2.04 on 8 April, is an important development for airlines like IAG. Fuel typically accounts for around 25%-30% of an airline’s operating costs. Lower prices provide immediate relief, improving profitability and enabling greater financial flexibility. This price drop is, as most things are, linked to Trump’s tariffs, which have dampened global trade and manufacturing activity, reducing oil demand and driving prices down.
IAG has hedged “a proportion” of its fuel consumption for up to two years. But it does have some exposure to spot prices. However for IAG, balancing the benefits of cheaper fuel against potential declines in revenue will be critical moving forward.
The valuation picture remains attractive
IAG’s valuation metrics suggest strong growth potential, particularly when looking at forward price-to-earnings (P/E) ratios. The P/E is forecast to decline steadily from 6.6 times in 2024 to 4.3 times in 2025 and further to 3.6 times by 2027, reflecting anticipated earnings growth. Analysts project robust profitability improvements, supported by recovering travel demand, operational efficiencies, and a healthier balance sheet.
Broadly, these figures support the notion that the stock should be trading higher. In fact, even at 300p, the stock was cheap on paper, trading at a near 25% discount to major US peers. What’s more, I’d suggest that lower fuel prices really could make a big difference to summer earnings if they hold and passenger demand doesn’t fall of a cliff — my base case. I’m not buying more stock as this price as I’m currently favouring Jet2. But I do think IAG is worth considering for those with an airline-shaped hole in their portfolios.
