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easyJet - a strong performance, but costs still rising

Nicholas Hyett | 21 January 2020 | A A A
easyJet - a strong performance, but costs still rising

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easyJet plc Ordinary 27 2/7p

Sell: 688.40 | Buy: 689.20 | Change -51.20 (-6.92%)
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Total revenue for the first quarter increased 9.9%, with an increase in customer numbers, ticket prices and ancillary revenues. After what management described as a "strong performance", easyJet expects to deliver a better first half loss than last year, when the airline lost £275m.

The shares rose 3.6% following the announcement.

View the latest easyjet share price and how to deal

Our View

Airlines can be fickle friends for investors. Profits are influenced by lots of factors outside companies' control, including weather, terrorism and strikes. Most recently the group has been held back by intense competition and Brexit uncertainty, though we may expect this to abate as we reach the endgame.

Sterling fell sharply after the vote back in 2016 and remains well down versus the euro, which reduces Brits' spending power abroad. And when the UK finally goes through the EU departure gate, there could be extra travel regulations to contend with.

Bankruptcies at some smaller players have helped douse the fierce competition to a degree. Less competition is good news for prices, as the same number of flyers chase fewer seats. Add to this slowing capacity growth, not only at easyJet but Ryanair too, and we could be entering a more stable pricing period.

Unfortunately, costs are set to increase, which is particularly bad news as the dividend is tied directly to earnings.

Airline analysts have tended to separate fuel costs out of total costs, in recognition of the fact that there's nothing management can do about global oil prices. This year easyJet expects to spend between £110m and £170m more on fuel than it did last year, of which around £25m will be the group's carbon offset program.

Non-fuel costs are the ones management has to keep down, and after a long period of poor performance it looked like these might be turning around. That's not been sustainable though, with non-fuel costs rising again in the first quarter - although events like the recent French air traffic control strike are outside management's control.

Overall, it's a mixed picture for easyJet. That probably explains why the shares are valued pretty much in line with their longer-term average on a price-to-book basis, and currently offer a prospective yield of 3.5%.

Airlines are a cyclical industry, and the shares have tended to reflect this. Long term investors should expect a bumpy ride.

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First Quarter Results

Total revenue for the first quarter increased 9.9% to £1.4bn, of which £1.1bn was ticket revenue. Passenger numbers increased 2.2% to 22.2 million, reflecting a 1% increase in capacity and fuller planes. Of easyJet's 24.3m seats, 91.3% were filled, an increase of 1.6 percentage points compared to last year. Total airline revenue per seat exceeded expectations and increased 8.8%.

Management attributed the strong revenue performance to lower industry capacity growth, stronger allocated seating sales and bag sales, and the work done to optimise operations in Germany. The group also benefited from the collapse of Thomas Cook.

easyJet's cost per seat excluding fuel at constant currency increased 4.3%, which was in line with management expectations. The increase comes despite easyJet's Operational Resilience program, and management blamed a slew of factors including increased ground handling costs, new crew pay deals and French air traffic control strikes.

easyJet experienced 1,274 cancellations during the quarter, and management attributed 813 of these to the French strikes. Overall, 80% of flights were on time, up from 79% last year.

easyJet expects first half capacity to grow by 1.5%, below the previously expected 1.7% as a result of the French strikes. First half revenue is expected to increase by "mid-to-high single digits", instead of "low-to-mid single digits", and costs will be up "mid single digits".

The full year fuel bill is expected to up between £110m and £170m, including the impact of the group's carbon offset program.

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 disclosure for more information.