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Highlights
- IAG soars on transatlantic demand: British Airways’ parent company enjoys momentum from robust pricing and operational improvements.
- Diageo eyes recovery from US challenges: Spirits giant faces headwinds but sees potential for a cyclical rebound in 2025.
- Key sectors diverge: Airlines thrive amid demand growth, while the spirits market grapples with temperance and trade-down trends.
As 2025 looms, two iconic British brands, International Consolidated Airlines Group SA (LSE:IAG) and Diageo PLC (LSE:DGE), find themselves on opposite ends of the market spectrum. IAG, buoyed by the aviation sector’s recovery, rides a wave of momentum, while Diageo faces challenges in its core US spirits market, sparking debates over its potential recovery. Here’s how analysts are viewing the prospects for these two stalwarts in the coming year.
IAG: Taking Flight with Momentum
IAG, owner of British Airways and other leading airlines, has seen its share price hit its highest levels in nearly four years. Analysts are optimistic about the airline giant’s future, fueled by transatlantic capacity constraints and resilient demand.
Analyst Optimism
Deutsche Bank recently upgraded IAG to a 'buy,' citing its ability to capitalize on high demand and limited capacity in key routes, particularly transatlantic flights. Lower fuel costs are another tailwind that could drive earnings growth in 2025. The bank set a price target of 400p, significantly higher than its current 302p level.
JP Morgan also endorsed IAG as the standout airline stock, highlighting robust free cash flow and the potential for shareholder returns. The bank noted that resilient pricing and a balanced demand-supply dynamic would benefit the company in 2025.
Potential Risks
Challenges loom in the form of supply chain issues affecting aircraft deliveries from manufacturers like Boeing and Airbus. Trade body IATA has highlighted a significant shortfall in aircraft deliveries, which could constrain fleet expansions. However, high load factors and the ability to charge premium prices may offset these limitations.
Diageo: Betting on Recovery
While IAG thrives, Diageo, the maker of Guinness and Johnnie Walker, faces a tougher landscape. Falling premium spirits sales in the US and concerns over demand in China have weighed heavily on its share price, prompting analysts to split between skeptics and optimists.
Challenges
Deutsche Bank remains cautious, citing risks like a potential decline in spirits demand in China and shifting consumer habits in the US. The bank recently lowered its price target for Diageo to 1,970p, pointing to challenges like temperance trends and trade-down behavior among US consumers.
The Case for Recovery
Other analysts, such as UBS and Jefferies, see a brighter outlook for Diageo. UBS recently upgraded the stock to a 'buy,' banking on strong growth in segments like tequila and the belief that the US spirits cycle is nearing its trough. Jefferies echoed this sentiment, expressing optimism about new finance chief Nik Jhangiani’s potential to drive operational efficiency and shareholder returns.
Sector Divergence: Airlines vs. Spirits
The diverging fortunes of IAG and Diageo reflect broader sector trends. Airlines are enjoying a resurgence as travel demand surges post-pandemic, while the spirits market grapples with structural and cyclical challenges. Analysts suggest that while IAG benefits from clear momentum, Diageo’s future hinges on the successful execution of its recovery strategy.
Outlook for 2025
As the new year approaches, the competition between momentum and recovery strategies will likely play out across sectors. February’s interim results for Diageo are expected to provide crucial insights into whether it can regain its footing. Meanwhile, IAG’s focus on leveraging transatlantic demand and cost efficiencies positions it as a strong contender for continued growth.
The 'IAG derby' of 2025 could offer valuable lessons for navigating contrasting market dynamics, with investors closely monitoring which approach ultimately triumphs.
