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easyJet - revenues up, but costs rise too

George Salmon | 18 July 2018 | A A A
easyJet - revenues up, but costs rise too

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easyJet plc Ordinary 27 2/7p

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Despite increased headwinds around the sector, easyJet has increased profit guidance for the year. Having previously expected pre-tax profits of £530m to £580m, the group now expects to make £550m to £590m.

The shares rose 4% on the news.

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Our View

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

Against that background, results so far this year have marked a dramatic change of tone.

Revenue per seat has returned to healthy growth, boosted by fuller planes and a strong performance from ancillary revenues. Bookings are healthy and the revenue per seat trend is expected to continue.

Perhaps most importantly, easyJet has benefited from industry-wide capacity reductions and lower growth following the bankruptcies of Monarch, Air Berlin and Alitalia. The combination of reduced total capacity and strong demand is behind forecasts for higher profits this year.

The policy of paying out 50% of profits as dividends means the increase in expected earnings should make it through to shareholders pockets. easyJet currently offers a prospective yield of 4.1% next year.

However, both easyJet and Ryanair are eyeing new planes with more seats, which has potential to reignite the price war.

If that happens cost control will decide the winner, and easyJet's not the strongest performer on that front. The group is still benefitting from lower fuel costs, but that tailwind is running out of puff, and is outside its control in any case. More important are the non-fuel costs easyJet can influence.

Scale benefits from larger, more efficient aircraft and growth at key airports are helping, but non-fuel costs per seat remain stubbornly high and continue to climb.

This shouldn't be a problem in the short-run, but it won't make for a robust business if times turn tough. Whether planes are full and flying or empty and grounded, leases and loans must be repaid. Even a small downturn in customer numbers could seriously dent profits.

The shares currently trade on a price to book ratio of 2.3 times, more than 20% above their long term average. With the industry starting to look more favourable that's perhaps not a surprise, but we'd like to see meaningful progress on non-fuel costs before turning more positive.

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Third quarter trading details (at constant exchange rates)

Excluding recently added routes from Berlin Tegel, underlying passenger numbers rose 3.6%. That's slightly ahead of the 2.5% increase in capacity, meaning EasyJet not only flew more planes, but also had fewer empty seats. The group also delivered an 11.5% increase in ancillary revenue per seat, which helped revenue per seat rise 4.8% to £60.55.

Together, these factors helped total revenue, again excluding Berlin Tegel, rose 9.4% to £1.5bn.

On the cost side, cost per seat rose just 3.1%, to £54.00, although this included a higher than expected increase in non-fuel operating cost. Employee costs, underlying inflation and an extra £25m as a result of recent industrial action and air traffic restrictions across Europe were all contributing factors.

Looking ahead to the full year, easyJet expects capacity to grow around 4.5%, with revenue per seat increasing by low- to mid-single digits. Increases in cost per seat are set to be limited to 3%, assuming normal levels of disruption in Q4.

Services from Berlin Tegel have enjoyed higher load factors, reaching 86% in June. However, a more competitive than anticipated environment means losses for the year are expected to be around £125m, ahead of previous guidance of up to £95m.

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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.

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.