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easyJet - COVID-19 update

Emilie Stevens, Equity Analyst | 16 March 2020 | A A A
easyJet - COVID-19 update

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easyJet plc Ordinary 27 2/7p

Sell: 662.00 | Buy: 664.00 | Change 0.00 (0.00%)
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easyJet confirmed it continues to cancel a significant number of flights in response to coronavirus travel restrictions and reduced customer demand. These actions will continue for the foreseeable future and could see most of the fleet grounded.

easyJet said it's not possible to give financial guidance for the year ahead, given the level of uncertainty at the moment.

The shares fell 21.2% follow the news.

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 and right now that's almost everything.

Coronavirus has meant many of us have chosen not to fly and this has been amplified by government travel bans. easyJet, like it's peers, is choosing to ground its planes and look for every available cost saving.

Prior to COVID-19 investors will have been focussed on things like easyJet's increasing fuel and non-fuel costs, impact of strikes and Brexit induced changes. But with business far from usual a focus on the typical metrics seem remiss for now.

Instead investors are likely to be focussing on easyJet's financial strength.

easyJet's balance sheet is in reasonable shape, and at the half year mark (September 2019) the group's underlying net debt position was £326m. But it has less cash on hand than some of its peers. Today the airline confirmed it has £1.6bn in cash, an undrawn credit facility of $500, and other assets it could potentially use to access liquidity. These will be essential to see the group through the outbreak. We still don't know how long the disruption will last - or how long easyJet can endure an extended shutdown.

easyJet CEO Johan Lundgren said today the industry faced a "precarious future" and one in which government help would be essential. While the government are aware of this and in talks with the airline industry, any formal funding help is yet to be announced.

All in, a lot hangs in the balance. While investors could be rewarded for staying in there in the long run - there looks set to be further pain ahead. These large question marks have hurt the share price over recent weeks and it's still too soon to say what'll happen next.

Prior to today, the shares were valued in line with their longer-term average on a price-to-book basis at 1.82. But in light of these events we'd suggest caution when looking at historic metrics like this one.

In a similar vein, the prospect of any dividends should, in our opinion, be viewed sceptically as future payouts are tied directly to earnings.

While airline investors will be somewhat used to turbulence, the next few months are set to be particularly testing.

Register for updates on easyJet

COVID-19 Update

As well as reducing capacity, easyJet said it's "taking every action" to remove cost and non-essential spending.

The group said it has a strong balance sheet, including a cash balance of £1.6bn and $500m in undrawn credit. easyJet also said it had aircraft it values at over £4bn and other assets it could potentially use to access liquidity.

Johan Lundgren, CEO, said "European aviation faces a precarious future and it is clear that coordinated government backing will be required to ensure the industry survives and is able to continue to operate when the crisis is over."

First Quarter Results (21 January 2020)

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%.

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.

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