IAG: Small Q2 beat driven by better costs. Outlook robust driven by long-haul, but expect muted reaction today due to slightly lower pricing than expected

Research evidence excerpt

IAG: Small Q2 beat driven by better costs. Outlook robust driven by long-haul, but expect muted reaction today due to slightly lower pricing than expected

Harry J Gowers AC Europe Equity Research

(44-20) 7134-7522 31 July 2026 J P M O R G A N

harry.gowers@jpmorgan.com

Investment Thesis, Valuation and Risks

IAG (Overweight; Price Target: €6.00)

Investment Thesis

• We expect robust earnings this year despite the impact from higher fuel, driven by strong

long-haul demand and pricing power in IAG’s core markets including Transatlantic and

LATAM. IAG’s comments for c60% fuel pass-through may end up being too

conservative for H2.

• IAG’s re-investment cycle has the potential to drive higher EBIT margins above 15%

mid-term as it re-invests into customer experience, IT & systems, and general operations

to improve reliability, and its product offering—particularly at British Airways.

• We forecast high FCF generation at IAG, materially above peers, and see scope for

further cash returns through share buybacks over the coming years.

Valuation

In our view, IAG should trade on a 10% discount to its average multiples since 2014 (ex the

pandemic) due to lower growth. Our Dec-27 PT of €6 is thus based on the average of the

following target multiples applied to our 2028 forecasts (5x EV/EBITDA; 7x EV/EBIT; 6x

P/E).

Risks to Rating and Price Target

IAG specific risks: (1) Underlying passenger demand is weaker than expected, leading to

lower unit revenues than we forecast in 2026. (2) Business volume recovery begins to

plateau and decline and cannot be offset by leisure demand. (3) Market capacity on the

Transatlantic increases quicker than the level of demand, which could lead to worse pricing,

especially out of key hubs such as LHR or Madrid. (4) Weakness in IAG’s other businesses