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easyJet - Passenger growth sees revenues soar

Nicholas Hyett | 23 January 2018 | A A A
easyJet - Passenger growth sees revenues soar

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easyJet plc Ordinary 27 2/7p

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More planes, with fewer empty seats, boosted easyJet's first quarter revenues by 14.4%, hitting £1.1bn.

The shares rose 5.1% in early trading.

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Our View

Increased passenger numbers have kept easyJet's revenue moving in the right direction in recent updates. However, margins have suffered as capacity flooded into the market, forcing prices down.

Against that background, first quarter results marked a dramatic change of tone.

Revenue per seat returned to healthy growth, boosted by fewer empty seats and a strong performance from ancillary revenues. Bookings are healthy and the trend on revenue per seat is expected to continue.

Cost savings are also benefitting from the trend for fuller planes. Meanwhile scale benefits from larger, more efficient aircraft and growth at key airports are also playing a part.

Perhaps most importantly, easyJet has benefited from industry wide capacity reductions and lower growth following the bankruptcies of Monarch, Air Berlin and Alitalia as well as Ryanair's flight cancellations. The combination of reduced capacity and strong demand should be supporting prices.

However, capacity expansion remains an issue longer term. Both easyJet and Ryanair are eyeing new planes with more seats, which has potential to reignite the price war.

Curiously, higher fuel prices could provide some assistance. While higher prices raise costs in the short-term, they would likely hurt smaller players more than easyJet. That could force excess capacity out of the industry.

Overall first quarter results represent a significant improvement on recent trends. The policy of paying out 50% of profits as dividends means increased earnings should make it through to shareholders pockets. However, it takes more than one quarter to make a turnaround, and Ryanair's recent problems aren't likely to repeat. Until we see evidence of a sustained improvement, we remain cautious.

easyJet currently offers a prospective yield of 2.8%, although with the shares trading on a price to book ratio of 2 times, they're almost 30% above their long term average.

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First Quarter Trading

An 8% increase in first quarter passenger numbers, now at 18.8m, reflects a 5.5% increase in capacity (to 20.4m seats) and an improvement in load factor (essentially a measure of how full planes are) which rose 2.1 percentage points to 92.1%.

Revenue was also boosted by a 6.6% increase in revenue per seat and 20% increase in ancillary revenue (which now stands at £226.3m).

Headline costs per seat fell 3.3%, reflecting lower fuel costs. Excluding the effect of fuel prices, costs rose 1%, in line with full year expectations, as savings in underlying costs were offset by inflation and the impact of disruption, mainly due to severe weather and industrial action.

Despite this disruption easyJet improved its on time performance, with 81% of flights arriving within 15 minutes of their scheduled arrival time.

The group began operating from Berlin Tegel airport on 5 January, following the acquisition of Air Berlin operations.

easyJet expects capacity, excluding Berlin Tegel, to grow by between 5-6% in the full year. Approximately 60% of expected bookings for the second quarter, excluding the Air Berlin operations, have now been secured, slightly ahead of the prior year.

Net cash remains broadly unchanged at £357m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.