Shares in travel stocks have taken another pasting as the Omicron Covid variant spreads. Our head of markets looks at latest results to assess easyJet's resilience.
Caught in the eye of the storm as the latest variant derails a tentative recovery, the outlook for airlines has been thrown into doubt once more.
While the extent and impact of Omicron are not yet fully understood, the reaction from governments in restricting travel is becoming the norm. This begs the questions of how future variants and mutations are dealt with by the authorities, and whether the airlines can even hope to prosper given the stop-start nature of the present recovery.
In addition, the propensity of consumers to travel is under renewed pressure, as some will decide on the safe option of not travelling at all. At the same time, cash burn for airlines remains and with even part of the fleet standing idle there is little room for manoeuvre in raising revenues to combat the costs incurred to date.
Yet for all the headwinds, easyJet (LSE:EZJ) is making a concerted effort to become responsive and agile when circumstances permit.
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The airline is concentrating on its general network and in particular higher-margin hubs, while at the same time ramping up its ancillary products to increase revenues. Also mindful of potential challenges ahead, it has restructured its cost base which, for this reporting period, resulted in a reduction of 33% to headline costs.
Its £1.2 billion rights issue allowed not only some financial underpinning of the balance sheet, but also the ability to react to business opportunities such as the cost of being present in new hubs.
Overall, it has access to some £4.4 billion of liquidity, which will comfortably keep the wolf from the door for the time being. However, the repayment of net debt will need to be addressed in due course and, in the meantime, the likelihood of a return to dividend payments will be an extremely low priority.
Even though some progress is being made, the numbers make for uncomfortable reading which underline the magnitude of the challenges ahead. While revenues were in line with expectations, for example, they were down by 52% compared to 2020 and down by 77% compared to pre-pandemic levels.
The gap between revenue per seat and cost per seat is also widening, and while the pre-tax loss number of £1 billion is slightly better than expectations, set against the restrictions of running at 17% capacity in the third quarter and 58% in the fourth, the company has been forced to run the business with one hand tied behind its back.
With this in mind, the outlook is defiantly upbeat. Perhaps the summer months will provide a respite from any meaningful variants emerging, and for easyJet second-half revenues for the coming year are expected to exceed pre-pandemic levels as consumers return to the traditional summer holiday. The group also expects a load factor of 80% in the current quarter on an improved capacity number of 65% and is determined to benefit from any easing of travel restrictions as the year progresses.
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Despite its best efforts, easyJet is inevitably at the mercy of factors outside its control, and this has been reflected in a share price which has dipped 8% in the last week alone.
Over the last year, the shares have lost 29% as compared to a gain of 18% for the wider FTSE250 index, thus significantly missing out on the tentative economic recoveries being seen elsewhere. The volatility surrounding airline shares in general has propelled them to be at the more speculative end of the scale, although the market consensus of the stock as a "strong buy" reflects that optimism on eventual recovery prospects remains undimmed in the eyes of many.
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