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easyJet - Competition continues to squeeze prices

Equity research team | 24 January 2017 | A A A
easyJet - Competition continues to squeeze prices

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easyJet plc Ordinary 27 2/7p

Sell: 527.80 | Buy: 528.60 | Change 0.20 (0.04%)
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easyJet saw first quarter passenger numbers increase 8.2%, driven by an 8.6% increase in capacity. This helped revenues rise 7.2%, however, load factor (a measure of how full the company's planes are flying) decreased 0.3 percentage points to 90%, while revenue per seat fell 8.2% at constant currency. The shares fell 7.3% in early trading.

Our View

There's an increasing danger that the European shorthaul market turns into a brutal slogging match.

Capacity is pouring into the industry and that's forcing carriers to cut prices. easyJet is no exception, and only increases in its own capacity is keeping revenues moving in the right direction. Lower fuel prices are keeping struggling carriers afloat, but even easyJet is fighting to keep non-fuel costs low. Industrial disruption and terrorist activity have added to the industry's woes.

easyJet faces additional challenges versus its less UK centric rivals. While many FTSE 100 companies have benefited from weaker sterling, leading the index to record highs, recent currency movements have not been easyJet's friend.

European revenues are now more valuable, but operations at European airports are more expensive when servicing UK customers. This problem is not helped by the weaker pound making it less affordable for the UK customer to go abroad in the first place. Lower sterling also undermines some of the benefits from lower fuel costs (which is priced in dollars).

easyJet has advantages though. As the number one or two player in many of its major markets it should be in a strong position to negotiate with airports and ground crews, helping it to reduce costs. The airline is continuing to build out capacity at its major bases and that should reinforce this process. Increasing scale could prove vital if prices continue to fall - which is why the group remains committed to capacity growth this year.

easyJet currently offers a prospective yield of 4% . However, its policy of paying out 50% of profits means that the dividend could prove volatile if headwinds continue to impact the bottom line. The stock currently trades on 1.5 times book value, only fractionally below its longer term average.

First quarter interim management statement

The ongoing decline in revenue per seat at easyJet, albeit slower than initially expected, is being driven by increased competitor capacity in easyJet's markets. That's supported by the lower fuel price, as well as the impact of the Berlin Christmas market attack.

However, easyJet's ability to increase passenger numbers means that headline revenue is improving. The group is also benefitting from lower fuel costs, with cost per seat is down 2.1% at constant currency, although, excluding fuel, costs rose 1.1%.

79% of the group's planes landed on time, slightly behind last year's 82%, as operational performance was impacted by poor weather.

Outlook

easyJet plans to increase its capacity by 9% at both the half year and full year. The group has secured approximately 56% of bookings for the second quarter, slightly ahead of the prior year.

Revenue per seat is expected to decline by high single digits over the year, with cost per seat (ex. fuel) expected to increase by around 1% at the full year.

Weaker sterling is expected to have a negative impact on profits of around £105m.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.