ii view: easyJet in red but demand is 'solid'

Shares in this major low-cost airline remain down by around a half year-to-date. Buy, sell, or hold? 

Full-year trading update to 30 September

• Expects a full year pre-tax loss of between £170 million to £190 million

Chief executive Johan Lundgren said: 

"Our step change in ancillary revenue has continued to deliver, alongside easyJet holidays making a profitable contribution in its first full year of operations. This was alongside our operational performance being ahead of the same period in 2019 while customer satisfaction indicators also exceeded pre-pandemic levels over the peak summer.

"Our summer 23 season went on sale last week and we were filling the equivalent of more than four A320 aircraft a minute in the opening hours demonstrating the continued demand.

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"easyJet is Europe's largest operator at primary airports with one of the strongest balance sheets in the aviation industry. We face the uncertain macro-economic environment with many strengths through our brand, network and business model which enable us to provide low fares to millions despite the rising cost of living."

ii round-up:

Budget airline easyJet (LSE:EZJ) today flagged expectations for a pre-tax loss of between £170-£190 million for the year to the end of September, broadly in line with City forecasts. 

The loss includes £75 million of disruption costs following summer airport staff shortages, meaning there's no dividend in 2022, although the carrier flew over 26 million passengers during the final quarter. That equates to 88% of its pre-pandemic 2019 capacity, up from 58% in the year ago quarter. 

easyJet shares rose by around 1% in afternoon UK trading having come into this latest update down by close to a half year-to-date. Shares for fellow FTSE 250 company Wizz Air Holdings (LSE:WIZZ) have fallen by around two-thirds during 2022, while the FTSE 250 index is down nearer to a third. 

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The Luton headquartered airline expects current first quarter capacity to rise by around 30% year-over-year to approximately 20 million seats, equal to 83% of its pre-pandemic 2019 levels. UK capacity during the peak travel periods, such as October half-term and Christmas week, are now back to pre-Covid levels.

easyJet management pointed to strong fuel price hedging during the year with revenues further benefiting from ancillary sales, and its easyJet holiday business generating a full-year pre-tax profit of more than £35 million. 

Broker UBS reiterated its ‘buy’ rating on the shares following the update, noting that “the performance should reassure versus expectations.”

Full-year results are scheduled for 29 November.

ii view:

easyJet is a short-haul European airline operating a fleet of Airbus jets. Its strategy include moving aircraft to airports of higher demand, growing its easyJet holidays business in partnership with major hotel brands such as InterContinental Hotels (LSE:IHG) and Accor SA (EURONEXT:AC), and retaining a strong focus on costs. 

For investors, elevated inflation and rising interest rates feeding into a cost-of-living crisis provide a challenging backdrop. The Ukraine war on the doorstep of Europe leaves geopolitical tensions running high, while costs generally for businesses are rising. The pricing of items such as aviation fuel in US dollars is also unhelpful given its rise against the euro and the pound. Factors such as the weather also need to be remembered. 

More favourably, there's been a rebound in demand for travel in the wake of the pandemic. Management initiatives to raise ancillary or additional revenues like baggage look to be bearing fruit, progress for its holidays business is being made, while cash and money market deposits of £3.6 billion and net debt of £0.7 billion suggest a robust balance sheet. 

On balance, and while some caution remains sensible, a consensus analyst estimate of fair value standing at over £5 per share could interest more speculative investors. 

Positives: 

• Growing its holidays business
• Strong focus on costs

Negatives:

• Highly uncertain economic outlook
• Factors outside of management’s control like the weather can hinder performance

The average rating of stock market analysts:

Buy