It can be extremely difficult to ignore personal feelings towards a company when judging its investment potential.
A positive previous experience with a firm can, for example, lead an investor to conclude that it represents a worthwhile buying opportunity without first determining its financial strength, intrinsic value or competitive advantage.
Conversely, a poor personal experience can mean a company is deemed off-limits by an investor even if it offers a wide margin of safety, has a solid balance sheet and provides clear long-term growth potential.
Both situations can lead to disappointing returns compared with an investor who is able to put their emotions towards a company to one side when apportioning capital.
Indeed, the notion that one person’s experience can ever be sufficiently comprehensive to judge an entire company’s investment appeal is, in Questor’s view, optimistic at best.
With that in mind, investors should put aside their past experiences with British Airways when deciding whether shares in its owner, IAG, have long-term appeal.
A large proportion of UK-based investors are likely to have flown with British Airways at some point in their lives.
Some people may have had positive experiences, others less so. The key takeaway in this column’s view, though, is that the company’s investment fundamentals remain sound.
Its recently released first-quarter results showed a continued improvement in performance.
The company’s operating profit rose from €9m in the first quarter of last year to €68m in the same period of this year.
Passenger numbers rose by 8.6pc year-on-year, with passenger capacity increasing by 7pc and passenger load factor up by 1.6 percentage points to 83.1pc.
Passenger yield, meanwhile, was 2.4pc higher than in the same period of the previous year.
This impressive performance highlights an improvement in the company’s operating conditions, with it reporting strong demand across its variety of airlines.
This is unsurprising, since the economy’s outlook has significantly strengthened over recent months.
Annual inflation in the UK, for example, has fallen by 640 basis points in the past year so that it now stands at a relatively modest 2.3pc.
This puts less pressure on disposable incomes, thereby providing consumers with greater scope for spending on discretionary items such as air travel.
Indeed, global passenger demand rose by almost 14pc in March, according to the International Air Transport Association (IATA).
It forecasts that worldwide passenger numbers will increase by over 10pc this year and by a further 9pc next year as the industry finally surpasses pre-Covid levels of performance.
IAG, as well as the broader airline industry, is also set to benefit from interest rate cuts that are moving ever closer.
They should not only stimulate the economy, but prompt investors to rethink their somewhat cautious stance towards perceived risky, cyclical companies such as airlines.
Indeed, shares in British Airways’ owner currently trade on a price-to-earnings ratio of just four.
This suggests they offer an exceptionally wide margin of safety that could equate to significant capital growth over the coming years.
In tandem, the company’s overall risk is falling. In its latest quarterly update, it reported that net debt had declined by 20pc so that it now stands at €7.4bn.
Net finance costs, meanwhile, were covered nearly five times by operating profits in the latest financial year.
And with total liquidity amounting to €13.3bn, the firm is well placed to overcome any further industry-related challenges in the future.
Although non-fuel unit costs rose by 3.7pc year-on-year in its latest quarter, this was in line with expectations and was partly due to increased investment in the company’s customer offering.
Fuel unit costs, in contrast, declined by 4.9pc versus the same quarter of the previous year.
Since first being tipped by Questor in February 2021, IAG’s shares have produced a rather disappointing 5pc capital gain.
However, the company is well placed to benefit from improved operating conditions, prompted by falling inflation and interest rate cuts, that should lead to continued growth in its profits.
Its dirt-cheap market valuation suggests that there is significant scope for share price gains, while its improving financial strength means lower risk for investors.
Therefore, irrespective of any positive or negative personal feelings towards British Airways or any of the company’s other airlines, IAG remains a worthwhile long-term investment on a risk/reward basis.
Questor says: buy
Ticker: IAG
Share price at close: 173.7p
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