The International Consolidated Airlines (LSE: IAG) — or ‘IAG’ for short — share price looks cheap right now. Currently, the airline stock is trading on a price-to-earnings (P/E) ratio of just five.

I think this could be a classic ‘value trap’, however. Here’s why I don’t think the IAG share price is as cheap as it looks.

A strong performance in 2024

IAG has performed well recently.

In 2024, revenue was up 9% year on year while operating profit before exceptional items increased by 27%. On the back of this performance, the company hiked its dividend and announced a share buyback.

But as investors, we need to look forward and not back. And looking ahead, I see multiple challenges.

Challenges ahead

For starters, there’s a decent chance that we’re going to see a recession. This could lead consumers to cut back on discretionary spending. Long-haul flights – which are generally more profitable for airlines – could be at risk. Instead of opting for that trip to Disney World in Florida, a family may choose to go for a budget Ryanair holiday in Spain!

US issues

Secondly, the US – a key destination for IAG-owned British Airways – appears to have lost quite a bit of its appeal as a travel destination recently. This is illustrated by the fact that in March, the US had 45,800 fewer arrivals from the UK compared to the same month last year (-15% year on year).

What’s going on?

It seems that a combination of factors – including dislike of US President Donald Trump, detentions of visitors at the US border, and a strong dollar – are putting Europeans off when it comes to US travel. It’s worth noting that research by YouGov in March found that western European attitudes towards the US have become more negative since Trump’s reelection last November with more than half of people in Britain (53%), Germany (56%), Sweden (63%), and Denmark (74%) saying that they have an unfavourable opinion of the US.

A drop in travel from the UK to the US isn’t good news for IAG. That’s because the North Atlantic routes are a core part of the business, representing about 30% of total capacity by ASK (available seat kilometres). Ultimately, the company heavily relies on these routes for revenue and profit generation. And performance here can significantly influence the overall financial health of the group.

Tariffs

On top of all this, there’s tariff uncertainty. Right now, no one knows exactly how this is all going to work, but if IAG continues to modernise its fleet, it could be hit with extra charges.

Are forecasts too high?

Given these potential challenges, I believe current revenue and earnings forecasts may be too high. If the consensus earnings per share forecast for 2025 – which is currently 61.5 euro cents – comes down, the stock isn’t going to look as cheap as it does at present.

Of course, there’s a chance that IAG shares could still perform well from here. After all, they’ve experienced a big pullback recently (maybe a lot of risk is already priced in?).

I think there are better stocks to consider buying, however. To my mind, the recent pullback suggests that institutional investors see challenges ahead.