Image source: Getty Images
The International Consolidated Airlines Group (LSE:IAG) share price endured a sharp sell-off in April, sliding 7% for the month. The airline stock’s now trading 35% below its highs. Once the FTSE 100’s star performer, IAG’s recent turbulence has left investors questioning the causes behind the pullback.
Trump’s tariffs
The single biggest catalyst for the IAG decline has been the escalation of trade tensions globally. This, as most people know, was triggered by Donald Trump’s introduction of new tariffs.
On 2 April, the US imposed a 10% tariff on UK goods and a 20% tariff on EU goods, directly impacting the economic environment in which IAG operates. With the US as the UK’s largest export partner and a critical destination for IAG’s British Airways and Iberia brands, these tariffs have raised the viability of Europe-US trade, dampened demand and threatened broader UK economic growth.
The transatlantic routes are among IAG’s most profitable, particularly for business travel. As result of the tariffs and the uncertainty created, analysts expect businesses to cut costs, potentially reducing demand for premium air travel. This risk is compounded by warnings from major US airlines, such as Delta, about the possibility of a recession, which would further curtail both business and leisure travel.
Heathrow disruption
We can also attribute some of the pullback to the fire at an electrical substation in March that forced Heathrow Airport -Britain’s busiest aviation hub – to close for a full day. The event disrupted over 1,300 flights. British Airways, IAG’s flagship airline, was the hardest hit, accounting for nearly half of the cancelled or delayed flights. Compensation costs alone are projected to reduce IAG’s 2025 earnings by up to 3%.
Many moving parts
Beyond these headline events, broader market sentiment has shifted. In late March, the Competition and Markets Authority (CMA) mandated that IAG and other major airlines share more operational slots at London airports with competitors, particularly on lucrative US routes.
However, on the brighter side, jet fuel prices have been falling. These have actually moved from $2.31 a gallon on 2 April to $1.95, as I write. That’s a really substantial movement. As fuel accounts for 25-30% of an airline’s operating costs, this decline offers immediate cost savings for IAG.
Yet the benefit is tempered by the fact that lower fuel prices are themselves a result of weaker global trade and manufacturing activity, again, a symptom of the tariff wars. Moreover, IAG has hedged a portion of its fuel needs, but still has exposure to spot prices.
Good value, but I prefer Jet2
IAG stock certainly isn’t expensive at 4.9 times forward earnings. However, it’s no longer my favourite stock in the sector. I’ve actually been buying Jet2 shares incrementally over the past two months, and thanks to a little spike, it’s now my largest holding. The main reason is the valuation. It trades at 1.5 times earnings when adjusted for net cash. I expect to buy more Jet2 and simply hold my IAG shares.
