War and fuel keep easyJet shares near multi-year low

easyJet’s profit warning in April has taken some of the sting out of these much lower numbers, although the group remains cautiously optimistic for the remainder for the rest of the year and extremely upbeat on its ongoing strategy.

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The April trading statement guided for a first-half loss of between £540 million and £560 million, and the number has landed at £552 million. While the first half is traditionally one where airlines book a loss, the figure is nonetheless 40% higher than the previous year and well above the £420 million loss which investors had pencilled in.

Additional fuel costs of £25 million and increased legal provisions of £32 million exacerbated the loss, and the group is mindful that the second half will potentially be blighted by higher fuel costs and lower forward visibility.

Even so, there remain signs that easyJet is still in the ascent. Revenues grew by 12% to £3.95 billion over the half, comprising 10% growth in both the passenger and ancillary lines as well as a 30% uplift for its burgeoning holidays business. Passenger numbers grew by 6% and the load factor ticked up to 90%, while the group is 58% forward sold for the second half, within which 79% has come from the third quarter and 40% so far for the fourth.

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The benefits of increasing ancillary revenues, which include the likes of customer payments for personally allocated seats, baggage and food, are in evidence. Now accounting for 27% of group revenue, customers are clearly still readily prepared to pay for these extras, while also adding another string to the group’s revenue bow. This also chimes with the group’s value-conscious appeal and the increasing body of evidence which tends to suggest that the family holiday remains almost sacrosanct and outside of normal budgetary restraints, even given the tense geopolitical backdrop and pressure on consumer spending.

The easyJet holidays arm has been the recent star of the show. This is a burgeoning business which seems to have come at the right time, with cost-conscious consumers searching for value packages. The group has high hopes for the unit’s longer-term contribution to overall profits, which currently accounts for 13% of total group revenue.

easyJet previously hit its medium-term target early, resulting in a new target being set of £450 million of pre-tax profit by 2030. For this period, customer numbers grew yet again by 22%, now standing well in excess of 3 million, and the 30% increase in revenue to £518 million led to a pre-tax profit for the half of £61 million. Further expansion is now planned, including the introduction of new flight and hotel packages, which will include an expansion in Germany. With the second half already 76% sold, the immediate visibility is perhaps clearer than elsewhere.

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Meanwhile, net cash of £434 million and access to liquidity of £4.7 billion underpin the group’s ambitious expansion plans, which include the expansion of its fleet and destinations, closing underperforming bases with a switch of aircraft to more profitable routes and a generous shareholder return programme, where the current dividend yield of 3.8% is an invitation for investors to ride out the latest storm.

Indeed, these are turbulent times at easyJet. On top of the issues which have blighted the sector over recent years, ranging from industrial action, volcanic ash clouds, geopolitical tensions to virus outbreaks, the Middle East conflict has added to the difficulties. In addition, it remains to be seen whether the rest of the year could be affected by weaker demand, reducing the airline’s ability to offset some of the costs by increasing air fare prices.

The group is up against an extremely volatile backdrop which has seen the company flying into and out of the FTSE100 on several occasions over recent years, with the most recent move being relegation to the FTSE250 in March. The shares have fallen by 38% over the last year, as compared to a gain of 9% for the wider FTSE250, and have suffered a vertiginous drop of 70% from pre-pandemic levels.

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easyJet retains its lofty ambitions, which include £1 billion of pre-tax profit in the medium-term, but this will not be a clear run. Even so, underpinned by increasing ancillary revenues and profits for the holidays business, the share price decline emboldens the group’s undemanding valuation which, coupled with optimism surrounding prospects for the sector as a whole, should enable the market consensus as a buy to remain intact.

In the meantime however and by comparison, a 20% increase in the share price of British Airways owner International Consolidated Airlines over the last year underlines where investors’ priorities have tended to focus.