IAG shares were worth as much as 457p just before the pandemic struck, before falling to 94p by the start of October 2022. But the FTSE 100 airline has now recovered to 124p, rising by 32% over the past month alone.

Of course, IAG shares have been changing hands within a wide range over the past year. But a sustained recovery could be in the offing, especially given the rumours circulating that it could be buying out rival easyJet.

FTSE 100 stocks: IAG share price

Q3 results made pleasant reading for long-suffering investors. The British Airways, Vueling, and Iberia owner generated an operating profit of €1.21 billion, a substantial improvement over the €452 million loss of Q3 2021, and roughly in accordance with most analyst expectations.

With price increases compensating for lower overall capacity, the FTSE 100 company enthuses that revenues have now ‘fully recovered’ from the pandemic. Q3 revenue rose to €7.3 billion, an encouraging 0.9% increase over Q3 2019. And this was despite European airport strikes, closure of some flight routes to the Asia Pacific, and the wider economic downturn.

Further, while passenger capacity rose slightly quarter-on-quarter, it’s still only at 81% of Q3 2019 levels, suggesting that further profitability could be achieved in the medium term. IAG expects capacity to increase to 87% of pre-pandemic levels in Q4, and then rise even further to 95% during Q1 2023. In addition, it’s worth noting that European short-haul and transatlantic flights are back to more than 90% of pre-pandemic capacity.

Meanwhile, the FTSE 100 airline’s total liquidity stands at €13.5 billion, including €9.3 billion in cash. Concomitantly, net debt stands at €11.1 billion, suggesting that IAG has the cash to grow through the recovery.

The airline now expects to make annual profits of ‘approximately €1.1 billion,’ with net cash flow from operations to be ‘significantly positive for the year,’ on the condition that the pandemic does not strongly resurge, and despite increasingly costly jet fuel and the surging US dollar.

CEO Luis Gallego enthuses that in Q3 ‘all our airlines were significantly profitable, and we are continuing to see strong passenger demand, while capacity and load factors recover.’ Encouragingly, ‘leisure demand is particularly healthy and leisure revenue has recovered to pre-pandemic levels, while ‘business travel continues to recover steadily.’

Where next for IAG shares?

Recovering demand and widening margins are obviously good news for the FTSE 100 stock. However, Gallego has noted that despite ‘strong’ demand, there remain ‘uncertainties in the economic outlook and the ongoing pressures on households’ to consider.

But the CEO believes that the recovering company will continue ‘investing in a disciplined way in our service and our people, to build capacity and enable future growth.’

Of course, flagship brand British Airways has struggled with strikes and limited airport capacity over the summer when it had hoped to see a more sizeable recovery. However, the recovery appears to be delayed rather than cancelled. BA CEO Sean Doyle has hired nearly 6,000 new staff in recent months, so is nearly two-thirds of the way towards the airline’s recruitment target to be ready for next summer.

Of course, Heathrow is planning to further limit flights around Christmas, and sporadic European-wide strikes seem set to continue for now. In addition, a general economic downturn is widely expected for 2023, and its effect on IAG’s bottom line is yet to be felt.

However, the airline operator apparently feels confident in its own outlook. The Times has reported there is some ‘speculation’ that the FTSE 100 company will buy out FTSE 250 operator easyJet, leveraging its recent return to profitability to consolidate power over the European airline industry. Portuguese flag carrier TAP is another reported target.

Gallego has stated only that while he ‘wants to consolidate,’ mergers will only happen that ‘make sense.’

And that makes IAG shares one of the best FTSE 100 stocks to watch through Q4.

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