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As people jet away on their summer holidays, at least some of them will look around the crowded airport or plane and think what a great business an airline could be. Certainly, British Airways parent International Consolidated Airlines Group (LSE: IAG) has been in clover lately. The share price has gone up by a storming 126% over the past 12 months alone and is now 175% higher than it was five years ago.
Then again, high fixed costs, unpredictable demand, tough competition, and oil price volatility have long meant that airlines turn out to be terrible investments for some people.
As the saying goes, if you want to become a millionaire, start as a billionaire then buy an airline.
Starting as a billionaire is certainly not a problem I have! Still, ought I to consider buying some IAG shares for my portfolio?
Hard to escape the underlying economics
When times are good, typically only some passenger airlines do well. But when times do bad, even the best run can do badly.
This is a very tough business in which to make money with any sort of consistency. That has not changed and it is why, even at the best of times, I am wary of buying airline shares.
Looking around at the current assortment of economic and geopolitical risks, you can more or less take your pick. Energy price volatility, war risks in some regions, and a weak economy threatening passenger demand could all see revenues in the industry decline in the short- to medium-term.
That is before taking into account any nervousness about flying following a spate of well-publicised air accidents this year.
So, no matter how competitively International Consolidated Airlines positions itself, it has to contend with the fundamentally challenging economics of its industry.
Could gain altitude, but buckle in for potential turbulence
There is no doubt the company deserves credit for strong recent performance. Indeed, that helps explain why the share price has more than doubled over the past year.
In the first quarter, revenues grew 10% year on year. A €4m loss after tax for the equivalent period last year gave way to a €176m post-tax profit this time around. The company maintained its upbeat full-year outlook “whilst being mindful of the geopolitical and macroeconomic uncertainty”.
Can such rosy projections last, not only for this year but beyond?
The company faces all of the external pressures common to airlines, though its size and strong position at hub airports like Heathrow, Dublin, and Madrid help give it some advantages over smaller rivals.
I also see some potential for internally inflicted woes. Changes to BA’s loyalty programme went down like a lead bomb with some leisure travellers. It remains to be seen in coming months whether they help or hurt the business.
With the share price-to-earnings ratio sitting at just 8, the share still looks cheap, depending on how one feels about the company’s ability to maintain or grow its earnings per share. Indeed, if things go well, I see scope for the share price to move higher.
But the risks in the current economic and geopolitical environment put me off. I will not be investing.
