The Take — Buy. The market is pricing IAG as if 2026's fuel shock is the new normal. It isn't, and IAG is paying you to wait.
The screen's "P/E 2.8" is a data error, not a bargain signal — but the real number is still cheap. 2.8x reproduces exactly if you multiply IAG's TTM EPS (€0.669) by a 5-ordinary ADR ratio (the old ratio, still printed on some broker pages). The ADR is 2 ordinaries: $10.85 ÷ 2 = $5.43 = €4.84 = 409p, which matches the London tape. True P/E is 7.3x TTM adjusted EPS (€0.666). No tax gift inflates TTM (effective rate 27%); the one tax distortion in the history is 2023, when recognizing Spanish tax losses cut the rate to 13%. TTM actually carries a charge: €149m restructuring at Iberia/BA.
Normalized, not peak. Lease-adjusted operating margin over the full cycle (2015–19 and 2022–25, COVID years excluded) averages 12.4%. Pre-COVID it averaged 13.0%, and post-COVID 11.6% including the 5.4% recovery year 2022. TTM is 14.7%, so we haircut the run-rate by ~2.5pt and then take another ~0.5pt off for long-run jet fuel at $100/bbl. Even on that basis, at 8.5% WACC, with fleet reinvestment of 40% of NOPAT through 2031 (capex €3.4–3.6bn plus ~€1.3bn/yr of new leases), the ADR is worth $17.70 (€7.90/share).
The reverse DCF shows what the market is assuming. $10.85 requires either a permanent 8.2% operating margin, which IAG has beaten in every non-COVID year except 2022, or an 11.3% EUR WACC. EV is €25.8bn on €7.6bn TTM EBITDA (3.4x), and net debt including leases is 0.6x EBITDA, the strongest balance sheet in IAG's history. TTM FCF of €4.0bn is ~19% of market cap before lease repayments and ~12% after. The €1.5bn excess-cash return (~€800m done, rest by Feb-27) plus the dividend retires ~9% of the float a year at ~60% of intrinsic value, which is accretion you can calculate.
What the market fears, and why it doesn't break the thesis. (1) Fuel: the US–Iran escalation sent jet fuel to ~$170/bbl (Brent >$100). 2026 fuel guidance rose to €8.3–8.6bn, but ~60% is hedged and management expects to recover ~60% through fares. Our grid shows long-run jet has to stay at ~$150–170 for the price to be fair, which is a permanent-war assumption. (2) Transatlantic: the North Atlantic is the profit engine. H1 PRASK rose +7.1% at constant currency and premium/corporate demand is holding, but Aer Lingus unit revenue fell 3.8% as US carriers add seats. (3) FX: IAG is structurally short USD (fuel, aircraft). A stronger dollar hurts operations, but it also lifts the USD value of each ADR's euro earnings, so the two effects partly cancel.
Call:BUY / accumulate below $12 (≈453p). Our base is $17.70, and we'd trim above ~$16.5 (about 7% below base, where the fuel-shock risk premium is gone). Hold a full position only with fuel risk managed. The OTC ADR has no meaningful listed options, so the best expression is long the ADR (or IAG in London) paired with a small long-oil hedge, e.g. ~6–9-month out-of-the-money Brent/BNO calls sized so a +$30/bbl move offsets ~1/3 of the estimated equity drawdown. The hedge is cheap insurance against the one variable that can make the market right. Catalyst: Q3 trading update in early November (the peak quarter for the North Atlantic, plus the interim dividend decision).
Risk Profile — HIGH
HIGH
Jet fuel / Middle East: fuel was ~21% of revenue in 2025 and ~25% at today's spot. IAG is short oil. Hedges (~60% near-term, a 3-year rolling ladder) delay the hit by 12–18 months but don't remove it.
HIGH
Exogenous demand shocks (pandemic, war, terror, volcanic ash): 2020–21 lost €7.3bn of EBIT and forced a €2.7bn rights issue. We assign a 10% "shock" scenario rather than pretend it can't recur.
MED
Transatlantic yield: IAG is long premium North Atlantic demand (US corporate travel, US consumer wealth effect), and exposed to US carriers adding capacity.
MED
FX: short USD on costs, long GBP via BA's profits (translation into EUR). ADR holders are long EUR/USD.
MED
Labour / restructuring / ATC: €149m H1 restructuring at Iberia and BA, more due in H2 at BA and Aer Lingus. European ATC and strike disruption.
LOW
Balance sheet and pension: net debt incl. leases €4.7bn (0.6x), liquidity €11.9bn, BA pension in surplus (€2.2bn employee-benefit asset). Solvency isn't the issue it was in 2020.
What the "inventory" really is: about 628 aircraft (roughly half leased, all capitalized here as debt), the Heathrow and Madrid slot portfolios (an irreplaceable moat that isn't on the balance sheet), and Avios, the loyalty currency sold to card partners at near-100% margin. The equity is a levered call on the North Atlantic premium cabin, minus a short position in jet fuel.
Scenario values per ADR vs price
Bear: 8.5% LR margin, jet $120–135, growth ×0.6, WACC 9.5% → $6.02. Shock: COVID-lite, €6bn cash burn and dilution, then 10% margins → $9.39. Base: 12.4% normalized margin less a fuel drag, jet $112→$100 → $17.70. Bull: 14% (2024–25 level), jet $90–100 → $22.81. Weights 25/10/45/20 → $14.97. Dashed line = price.
Driver tornado: Δ value per ADR from base $17.70
The discount rate and the normalized margin dominate, and fuel is the margin question. Every single-variable downside still leaves value above $10.85. Getting to the price takes stacked adverse assumptions (bear) or a regime change.
Sensitivity: value per ADR, long-run jet fuel × WACC
Long-run jet fuel $/bbl ↓ / WACC (EUR) →
7.5%
8.0%
8.5%
9.0%
10.0%
$85
$24.7
$22.1
$19.9
$18.1
$15.1
$100
$22.1
$19.7
$17.7
$16.1
$13.4
$115
$19.4
$17.3
$15.6
$14.1
$11.8
$130
$16.7
$14.9
$13.4
$12.1
$10.1
$150
$13.2
$11.7
$10.5
$9.4
$7.8
$170
$9.6
$8.5
$7.6
$6.8
$5.5
Green = more than 15% above price, amber = within ±15%, red = more than 15% below. 2027 uses the midpoint of $112 and the long-run level (hedge lag). The model passes 60% of any fuel move through to fares (management's recovery estimate); the reference price for normalized margins is $95/bbl, the cycle average. Price is "fair" only at ~$150–170 long-run jet fuel or a WACC of 10% or more.
History: revenue vs lease-adjusted EBIT (€bn)
2020–21 are shown for completeness but excluded from normalization. 2015–18 EBIT is grossed up by about one-third of the operating-lease rental to match IFRS 16 (leases as debt).
Normalization worksheet (€m) and FCF
Year
Revenue
Op. profit pre-exc.
Lease adj.
Adj. EBIT
Margin
Fuel
Fuel/rev
FCF (IAG)
New leases
FCF − leases
2015
22,858
2,320
243
2,563
11.2%
6,031
26.4%
—
—
—
2016
22,567
2,535
284
2,819
12.5%
5,415
24.0%
—
—
—
2017
22,880
2,950
296
3,246
14.2%
4,610
20.1%
—
—
—
2018
24,406
3,230
297
3,527
14.5%
5,283
21.6%
—
—
—
2019
25,506
3,285
0
3,285
12.9%
6,021
23.6%
—
—
—
2020 (excl.)
7,806
-4,365
0
-4,365
-55.9%
3,737
47.9%
—
—
—
2021 (excl.)
8,455
-2,965
0
-2,965
-35.1%
2,186
25.9%
—
—
—
2022
23,066
1,247
0
1,247
5.4%
6,120
26.5%
979
1,017
-38
2023
29,453
3,507
0
3,507
11.9%
7,557
25.7%
1,320
1,315
5
2024
32,100
4,443
0
4,443
13.8%
7,608
23.7%
3,556
—
—
2025
33,213
5,024
0
5,024
15.1%
7,083
21.3%
3,146
—
—
TTM Jun-26
33,371
4,903
0
4,903
14.7%
~7,800
~23%
3,954
~1,300e
~2,650e
Cycle avg (9 yrs, ex 2020–21)
12.4%
Sources: IAG FY results 2017/18/23/25 and H1-26 (2015–16 and 2019 fuel, 2015–16 lease rentals and 2020–21 figures from memory of the annual reports, ±2%). 2017 is restated. FCF uses IAG's definition (operating cash flow less investing, before lease repayments). "New leases" are non-cash right-of-use additions, which are real fleet reinvestment when leases are treated as debt. SBC is ~€60m a year (immaterial, expensed). FCF figures before 2022 were not retrieved.
Lenses on the normalized margin: full cycle ex-COVID 12.4% · pre-COVID 2015–19 13.0% · post-COVID 2022–25 11.6% · ex-2022 13.3% · management target 12–15% · TTM 14.7%. We use 12.4% less a long-run fuel drag of ~0.5pt, giving 11.9%. Normalized EBIT on FY26E revenue is ~€4.2bn, against management's mid-cycle band of €4.0–5.0bn (12–15% on €33.6bn), so we sit at the low end. Normalized ROIC is ~24% on book invested capital of €13.3bn (equity written down by COVID losses), and the terminal ROIC is set at 12%.
PV explicit 14,796 + PV terminal 24,376 = operating value €39.2bn. Terminal share 62% (under the 70% flag). Tax 25% (UK/Spain blend; the H1 effective rate was 27%). Base revenue is FY26E €33.6bn (capacity flat, RASK +1%), growing 3% → 2%. Reinvestment is 40% of NOPAT in 2027–31 (fleet renewal: 16 deliveries in 2026, the 777-9/A350/A321XLR wave) and fades to g/ROIC. r > g ✓.
Cost of capital (EUR basis)
Risk-free: EUR 10Y Bund (~3.2%; UST at 5.2% implies a USD-consistent EUR rate of ~4.2% after the 1pt inflation differential)
Sources: IAG H1-2026 interim report (31 Jul 2026), FY2025/2023/2018 results releases (iairgroup.com), RNS total voting rights (26 Aug 2026) and buyback notices, Invezz (9 Sep 2026, jet $171/bbl, Brent >$100), interactive investor/Deutsche Bank (19 Mar 2026, hedge cover), Pound Sterling Live FX (14 Oct 2026), Robinhood quote and fundamentals (14 Oct 2026). Not investment advice.