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easyJet - Brexit proving a headwind

George Salmon | 1 April 2019 | A A A
easyJet - Brexit proving a headwind

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easyJet plc Ordinary 27 2/7p

Sell: 410.90 | Buy: 411.30 | Change 3.40 (0.83%)
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In a brief statement, easyJet has confirmed it still expects a half year pre-tax loss of around £275m, as cost increases outweigh top-line growth.

However, the group has also flagged extra caution around its second half, and said political uncertainty has dented customer demand.

The shares fell 7.2% on the news.

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Our View

Airlines can be fickle friends for investors. Fortunes are influenced by lots of factors outside companies' control, including weather, the oil price and strikes. Most recently it's been Brexit uncertainty holding the group back.

The UK's exit from the EU could potentially impact travel regulations and currency markets, and easyJet has reduced prices to counter the uncertainty. The group reckons demand will pick up later in the year, but a more pragmatic observer would say it's difficult to put a timeframe on when Westminster and the EU 27 will solve the Brexit puzzle.

And even when macro conditions give carriers a tailwind, companies don't have it all their own way. In recent years low fuel prices saw capacity flood into the wider market, compressing margins.

Bankruptcies from some smaller players have since dampened capacity growth, and so mean that headwind has finally started to ease. That has helped margins rise, and the policy of paying out 50% of profits as dividends means the benefits of more benign conditions should feed straight to shareholders pockets. easyJet currently offers a prospective yield of 5.5% in 2020.

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 tailwind from lower fuel costs has run out of puff, and is outside easyJet's control in any case. More important are the non-fuel operating costs the group can influence. Scale benefits from larger, more efficient aircraft and growth at key airports is helping, but the group's finding it tough to deliver cuts.

With costs remaining stubbornly high and uncertainty around Brexit lingering, there's clear potential for turbulence ahead.

Perhaps reflecting these concerns, the shares trade at a discount to their longer-term average on both a price to book and price to earnings basis. That could interest value-seeking investors, especially since the group's balance sheet has relatively little debt. But we'd still like to see meaningful progress on non-fuel costs before turning more positive.

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Trading details

Half year results are due on 17 May 2019. easyJet expects to report:

  • Revenue of £2.3bn. That would represent an increase of 7.3% on the prior year, as extra capacity, including the acquisition of Berlin Tegel operations, more than outweighs a 7.4% drop in revenue per seat.
  • An 18.8% increase in total costs, due to increased capacity, higher fuel prices and a 1.4% rise in underlying ex-fuel costs per seat.
  • A £8m headwind from adverse foreign exchange movements.

Looking further afield, easyJet says unanswered questions around Brexit is impacting demand and ticket prices. However, the group expects this to be more than offset by a stronger Q4, by which time it anticipates Brexit uncertainty to have reduced. Headline underlying ex-fuel costs per seat are expected to fall in the second half, offsetting the increase in H1.

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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.

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