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easyJet - entire fleet grounded

Sophie Lund-Yates, Equity Analyst | 30 March 2020 | A A A
easyJet - entire fleet grounded

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

easyJet plc Ordinary 27 2/7p

Sell: 844.80 | Buy: 846.20 | Change 29.20 (3.58%)
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easyJet has grounded its entire fleet due to the travel restrictions imposed by governments in response to COVID-19.

The group has also agreed with the Unite the union to furlough its cabin crew for two months, and 80% of wages for affected workers will be paid by the government.

These two measures relieve significant costs for easyJet, which also confirmed that it has no debt refinancing due until 2022.

At this point it is too early to know when the planes will get back into the air.

The shares fell 5.4% following 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. On 16 March 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 the industry faced a "precarious future" and one in which government help would be essential. While easyJet will benefit from measures the government has already announced, including wage support for furloughed workers, the Chancellor has ruled out a sector wide bailout for the industry. Individual deals could be on the table as a last resort but investors should expect them to come with onerous terms attached.

All in, a lot hangs in the balance. While investors could be rewarded for staying put over 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.

The shares currently change hands for 0.8 times book value, well below the long run average of 2.0. While this might look like good value, it reflects the serious risks facing the company. Furthermore, historic metrics like book value could get written down if the situation unfolds unfavourably.

As the dividend is tied directly to earnings, we think it's very unlike that investors will receive any form of payout in the near future.

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 (16/03/20)

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

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."

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.