Whatever happens with the pandemic over the next few weeks and months, 2022 will be a crucial year for the IAG (LSE: IAG) share price. After two years of disruption, rising losses and cost-cutting, the British Airways owner needs to get itself firmly back on track. Unfortunately, there is no guarantee the company this will happen.
I think three different scenarios are likely to dictate the stock’s performance next year.
Three different scenarios
In the best-case scenario, the global aviation industry will bounce back to 2019 levels next year. If traffic recovers to, or exceeds, 2019 levels, management will be able to start looking forward. It will finally be able to concentrate on rebuilding the business after the pandemic.
For IAG, which relies heavily on the lucrative transatlantic and long-haul travel routes, a recovery in international travel will be the most crucial development for the company.
While the number of travellers on domestic routes in the US and Europe has recovered substantially from pandemic lows, traffic on international routes is still underwhelming. In the best-case scenario, traffic on these routes will recover, which should power an earnings recovery.
And if this happens, I think the market will re-rate the stock to a higher level if the company’s outlook improves considerably.
In the base-case scenario, the number of travellers will remain depressed at around current levels. As IAG shares are already priced for this scenario, I think the reaction from the market to such an outcome would be relatively modest.
Finally, the worst-case scenario is a return to March 2020 conditions. Government travel bans will force the aviation industry back into cold storage. If this happens, IAG may have to look to its investors and creditors to provide additional financing to keep the lights on.
In this scenario, I think the stock could fall further in value. The overall decline will ultimately depend on the company’s financial position and if it has to raise additional capital.
The outlook for the IAG share price
I think the base-case scenario is the most likely outlook for the stock next year. I think it is unlikely the world will shut down again, considering how much disruption the first set of lockdowns caused.
However, this does not mean governments will do away with travel bans. It seems likely that these will remain the key tool in controlling the pandemic for the foreseeable future. While this might be good for the domestic hospitality sector, it is terrible news for international travel.
As such, I am not expecting much from the IAG share price in 2022. Therefore, I would not buy the stock today. I think there are plenty of other opportunities in the FTSE 100 that offer better growth prospects. That is considering the challenges of the pandemic and growth prospects for the economy next year.
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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.
