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easyJet - sales higher than expected, but costs up too

George Salmon | 28 September 2018 | A A A
easyJet - sales higher than expected, but costs up too

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easyJet plc Ordinary 27 2/7p

Sell: 408.90 | Buy: 409.40 | Change 3.10 (0.77%)
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In a trading update prior to full year results on 20 November, easyJet has confirmed it expects to deliver headline pre-tax profit of between £570m and £580m this year, at the top half of guidance. That's despite continued disruption from difficult weather conditions and flight cancellations in Q3.

However, underlying costs per seat have increased, and aren't expected to fall next year. easyJet will also incur a £65m charge as a result of changing tack on IT infrastructure plans.

The shares fell 1.9% on the news.

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Our View

Running an airline can be tough. Fortunes are influenced by lots of factors outside companies' control - weather, the oil price and strikes to name just three.

Even when macro conditions give carriers a tailwind, companies don't have it all their own way. That's something we've seen recently.

On the one hand, rising passenger numbers have helped easyJet fly more and fuller planes. Ancillary revenues have taken off too, ensuring revenue growth is on course. However, at the same time margins have suffered as increased capacity flooded into the market, forcing prices down.

That headwind is finally starting to ease. easyJet has benefited from industry-wide capacity reductions and lower growth following the bankruptcies of Monarch, Air Berlin and Alitalia. The combination of lower market capacity growth 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 5.2% 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 is helping, but non-fuel costs per seat remain stubbornly high.

This shouldn't be a problem in the short-run, but it won't make for a robust business if times turn tough. High fixed costs mean even a small downturn in customer numbers could seriously dent profits.

The shares currently trade on 1.9 times book value per share. That's lower than the more premium rating commanded earlier this year, but we'd still like to see meaningful progress on non-fuel costs before turning more positive.

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Trading details

Total revenue for the 12 months to 30 September 2018 is set to come in around £5.9bn, ahead of prior market expectations. That's been boosted by a 5.4% increase in passenger numbers (before accounting for the Tegel acquisition) and a 1 percentage point increase in load factor, to 93.6%.

This combination means underlying revenue per seat has risen around 6.5% this year, outstripping the 3.8% increase in underlying cost per seat, excluding fuel costs. Still, costs have risen by more than expected as a result of challenging recent conditions.

Expected losses from the recently acquired Berlin Tegel operations have reduced to around £115m, with cost savings upgraded to circa £45m this year.

easyJet expects to report a 'strong' net cash position.

Looking ahead to FY 2019, capacity is expected to increase 10%, including the impact of Tegel. easyJet has reminded investors the first half of this year was boosted by the bankruptcies of Monarch and Air Berlin, and Easter will fall in the second half next year.

That means first half underlying revenue per seat is expected to fall by low to mid-single digit percentages. easyJet expects underlying cost per seat excluding fuel costs to be flat.

Find out more about easyJet shares including how to invest

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.

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