Can IAG shares fly higher in 2023?

On 24 February, IAG (LON: IAG) released its much-anticipated full-year results for 2022. Thankfully, the FTSE 100 airline operator, which is now up by 19% year-to-date to 153p, has seen a ‘strong recovery in profits.’

However, IAG shares were changing hands for 165p just before the results were announced — and were trading for 436p immediately before the 2020 pandemic crash.

This leaves their trajectory for the rest of 2023 far from certain.

IAG share price: full-year results

IAG started its results by announcing that ‘in 2022 we saw a strong recovery in our core markets as COVID-19 restrictions were lifted, which drove revenue momentum and a return to profit with significantly positive operating cash flow.’
The FTSE 100 company saw operating profit before exceptional items of €1,225 million, a huge increase of €4,195 million compared to FY21. In terms of available seat kilometres (ASKs), the company restored capacity back to 87% of pre-pandemic levels, and moreover, passenger unit revenue was 11% higher, driven by ‘strong leisure traffic recovery and business traffic steadily improving.’

The airline operator has also invested €3.9 billion to make important improvements in fleet, customer offerings, IT infrastructure and sustainability, while simultaneously reducing net debt to €10.4 billion. Importantly, liquidity also rose by €2 billion €14.0 billion.

Of course, it’s not all roses. IAG saw non-fuel unit costs rise by 24.1% versus 2019, ‘driven by supplier cost inflation net of transformation initiatives, capacity levels still below 2019, and foreign exchange.’ Fuel unit costs also rose, by 30.2% on 2019 levels, driven primarily by Russia’s invasion of Ukraine.

Where next for IAG shares?

IAG expects to see further profit recovery in 2023, with full year operating profit before exceptional items expected to be in the range of €1.8 to €2.3 billion.

CEO Luis Gallego enthuses that ‘we are transforming our businesses, with the intention of returning IAG to pre-COVID levels of profit within the next few years...our unique group structure allows us to maximise revenue and cost synergies, and invest capital to achieve strong returns, whilst continuing progress towards net zero by 2050.’

Looking forward, IAG expects 2023 ASKs capacity to almost completely recover to circa 98% of pre-pandemic levels. However, assuming ‘no further setbacks related to COVID-19 or material impacts from geopolitical developments,’ the company still expects to make a €200 million operating loss in Q1.

It’s also worth noting that current debt still remains above its total market cap and more than treble its EBITDA, while dividends — a key pull factor of many FTSE 100 stocks — remain suspended.

While Gallego had indicated that fares would come down as pre-pandemic capacity was achieved, a further cost input could be coming from yet another quarter. Heathrow, at which IAG brand British Airways is the largest carrier, has been told by the Civil Aviation Authority to charge more per passenger under a new temporary price cap. This means a return to lower prices may take a little longer than previously anticipated.

In other news, IAG has agreed to pay €400 million to Spain’s Globalia for the remaining 80% of Air Europa, in an attempt to expand its reach into the Latin American market. Gallego believes that regulatory approval will take around 18 months and ‘will enable us to grow Madrid as a hub, offering a gateway to Latin America and beyond.’

Bernstein analyst Alex Irving thinks that ‘the star of the show is a renewed deal for Air Europa. While terms are not as favourable as the group acquires a more indebted business, we still see this as the right strategic move for the company and accretive to medium-term earnings.’

While the debt is weighing down IAG for now, this strategic acquisition alongside a general recovery could see IAG shares soar this year. Of course, it will still be some time before the group can consider a return to its pre-pandemic market value.

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