The IAG (LSE: IAG) share price has really struggled to move higher over the past couple of years.
It’s easy to understand why. First, the pandemic slammed into the company gutting its revenues and sending management scrambling to find money to keep the lights on. Then, when it looked as if the pandemic was disappearing in the rearview mirror, the crisis in Eastern Europe emerged.
The situation has sent oil prices surging higher, threatening to increase costs for airlines significantly. And rising prices are not just impacting the airline industry.
Hit to the economy
Higher prices are likely to have an impact on the entire global economy, which will almost certainly hit consumer spending. Lower levels of consumer spending will mean individuals will have less money to spend on luxuries such as holidays abroad.
Unfortunately, it does not look as if this crisis is going to come to an end any time soon. As such, it seems likely that the IAG share price will remain volatile.
Not only is the geopolitical situation threatening the company’s cost base, but an escalation of the situation in Eastern Europe could reverberate around the world.
In this worst-case scenario, I think it would be impossible for me to project how the development will impact the corporation.
IAG share price: green shoots
Still, there are some green shoots of growth that could help the business recover over the next few years. For a start, the aviation market in North America is almost back to pre-pandemic levels. This indicates that consumers have not changed their buying habits significantly over the past two years.
Indeed, during the pandemic, there were some concerns that consumers would never return to the skies. The thought of being stuck in a metal tube with hundreds of other people might put some people off, analysts argued.
However, as it turns out, this has not been the case. In some markets, consumers have rushed to return to flying. This has helped airlines recover faster than many analysts initially expected. At the same time, there is some evidence that consumers are willing to spend more now they are allowed to travel again.
Figures show that some consumers are forking out more cash for higher-margin seats, such as business and first class.
They are splashing out the savings they made during the pandemic on these luxury experiences.
Most profitable route
IAG’s most profitable route is between London and New York. This has been a profit centre of the group for decades. It does not look as if this is going to change.
The idea that consumers may be willing to pay more to travel on this route suggests it is only likely to become more valuable for the company and its British Airways brand. This is one of the primary reasons why I am cautiously optimistic about the outlook for the IAG share price in the long run.
The group has a significant foothold in this highly lucrative market. It will take a lot for competitors to uproot it from this position. The company’s financial resources, key landing slots at Heathrow and Gatwick, and its fleet of aircraft should ensure that competitors are kept at bay on the North Atlantic corridor.
These advantages also suggest to me that the enterprise is well-placed to grab market share in other parts of the world.
Over the past two years, the airline industry has been through hell. Some airlines have failed, and many others have only survived by taking on a lot of debt, or receiving bailouts from their respective governments.
I think the company could capitalise on this environment by acquiring smaller, weaker peers. This is the business model IAG has been using since its inception.
The corporation was essentially established to consolidate the airline industry in Europe. It has acquired a handful of brands over the past couple of years. By merging these brands, it can reduce costs and increase synergies by acquiring essential resources such as fuel in bulk.
That said, the business does not have the most robust balance sheet. Over the past couple of years, it has built up a lot of debt. In doing so, the business was able to navigate the pandemic albeit at a cost.
Still, the multibillion-pound company does have the support of the City of London. It could potentially raise additional finance if it wanted to expand overseas and capitalise on low valuations across the sector.
This is another reason why I think the company has a favourable long-term outlook.
Risks to the IAG share price
The airline industry is notoriously challenging to operate in. IAG has the competitive advantages required to navigate this challenging environment. Many of its smaller competitors do not have these advantages. That puts the business in a strong position to navigate anything the world may throw at it over the next decade.
Unfortunately, while I am cautiously optimistic about the outlook for the IAG share price in the long term, protecting what will happen over the next 12 months is slightly more difficult. Indeed, it is almost impossible to predict what will happen to a company’s share price in a short period, such as a year.
Therefore, I would focus on the organisation’s long-term potential. I would buy the stock as a speculative growth investment for the next 10 years.
Further, I would also overlook any uncertainty in the near term. I think uncertainty and volatility over the next 12 months will be nothing but noise compared to the company’s long-term outlook.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.