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IAG’s fortunes may take another turn if oil price remains high

The heightened tensions between US and Iran have pushed the oil price up, bringing airlines stocks down

International Consolidated Airlines Group - IAG’s fortunes may take another turn if oil price stays up

British Airways owner International Consolidated Airlines Group (LON:IAG) doesn't seem to be able to catch a break.

Self-inflicted injuries and Brexit uncertainty out the way, it was expected to provide a reasonably upbeat assessment of prospects on Wednesday alongside its trading update.

However, America's drone assassination of Iran's military leader Qassem Soleimani has put paid to that with oil prices soaring in its wake, hiking the cost of jet fuel.

READ: HSBC turns positive on Ryanair and IAG as UK election result provides “more clarity”

The FTSE 100-listed group was just enjoying some respite with upgrades to ‘buy’ from ‘hold’ by both HSBC and Citi Group last month.

But on Monday IAG and its peers Ryanair Holdings plc (LON:RYA), Wizz Air Holdings PLC (LON:WIZZ) and easyJet PLC (LON:EZJ) were down between 2% and 3%.

Fuel prices mean a lot

In the case of airlines, oil price is pivotal as fuel costs account for most of their operating expenses: from 36% for Ryanair to 25% for IAG.

Profit margins will be squeezed as the companies will be forced to purchase the fuel at a higher cost, having to boost ticket prices, Sam Wahab, head of oil & gas research at SP Angel, told Proactive.

“It is much like consumers driving cars: any increase in the oil price or oil price futures will have a corresponding impact on the prices we get at the pump,” he says.

Consumer confidence may be further shaken by the tensions in the Middle East areas, which, if sustained in the long term, may hit lucrative markets such as Egypt.

As some analysts say travel to the Middle East may be less enticing in the medium term, it seems an unfortunate day for Wizz Air to have announced an agreement with Abu Dhabi's state-owned development agency to establish operations in the emirate.

 “Airlines are volatile stocks and if people decide they do not want to take any risks, airlines are the first to be sold,” Russ Mould, investment director at AJ Bell, told Proactive.

Unless tensions de-escalate, IAG and the likes are set to remain under pressure, he added.

Quick facts: International Consolidated Airlines Group

Price: 623 GBX

LSE:IAG
Market: LSE
Market Cap: £12.37 billion
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