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easyJet - first half and COVID-19 update

Emilie Stevens, Equity Analyst | 16 April 2020 | A A A
easyJet -  first half and COVID-19 update

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easyJet plc Ordinary 27 2/7p

Sell: 684.00 | Buy: 686.20 | Change -60.00 (-8.11%)
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easyJet expects to deliver a headline loss of £185m - £205m for the six months ending 31 March 2020, an improvement on last year's £275m loss. Reported losses will be in the region of £360m to £380m once fuel and foreign exchange impacts are included.

Thanks to cost savings, deferring new plane purchases and raising new debt, CEO Johan Lundgren said "easyJet is well positioned to endure a prolonged grounding."

The group expects to burn £30m - £40m in operating costs each week while the fleet is grounded. On this basis the group could last up to nine months before needing to raise fresh capital.

The shares rose 8.4% following the news.

View the latest easyjet share price and how to deal

Our View

Airlines are in a very tough spot at the moment.

Government travel bans have grounded easyJet's fleet, so there's next to no cash coming in but the group still has large costs to pay.

After taking a number of cost saving actions, easyJet says it's currently burning through £30m to £40m cash each week. That's a decent reduction from the c.£125m it spends during normal operations. Combined with the group's reduced capital spending commitments and fundraising efforts, easyJet thinks it has nine months before it will need more cash.

We don't know how long the COVID-19 travel bans will last, so we can't say whether this will be enough. But at least investors now know where easyJet stands, and we were concerned it may have considerably less time than it does. A nine month period with no flights is certainly possible, but this new information gives us greater confidence in easyJet than we had yesterday.

However, even if easyJet survives it will be badly wounded. To put the current rate of cash burn in perspective, easyJet made £430m in profit before tax last year, and £445m the year before. To be frank, the group is staring at some colossal losses. Airlines typically lose money over the winter, as easyJet has in the six months ending 31 March. They then try to turn a large profit over the summer to compensate for this. That looks unlikely to be the case this summer.

The balance sheet is going to going to be hit badly, but unfortunately there's not much easyJet can do about that for now. In our view, there's a reasonable chance easyJet will try to raise fresh equity once all this is over. This could end up diluting current investors and leaving them with a smaller piece of the pie, but if it puts easyJet back into rude financial health that may not be the worst thing that could happen.

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 airlines. Individual deals could be on the table as a last resort but investors should expect them to come with onerous terms attached. Unless the fleet remains grounded until January we don't think easyJet will need one, but it's something investors should keep an eye on.

All in, easyJet's not out of the woods yet. 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.

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First half trading update

easyJet's total revenue increased 1.6% to £2.4bn and capacity fell 7.6%. Revenue per seat at constant currency is expected to have increased 10.2%, reflecting a strong performance prior to lockdowns. easyJet says forward bookings for next winter are ahead of where they were last year. Management thinks they can resume commercial flights with just two weeks' notice.

Total costs are expected to have fallen 1.6%, while headline costs per seat at constant currency excluding fuel are expected to have risen 9.5%. easyJet had expected roughly a 5% rise, and COVID-19 disruption drove the remaining 4.5%.

To save cash easyJet is reducing its fuel spending, has virtually eliminated ground handling costs, furloughed the majority of its staff, and halted all marketing spending and non-essential maintenance. As a result, easyJet estimates its weekly cash burn at £30m - £40m, compared with around £120m when flying a full schedule.

By deferring the purchase of 24 Airbus planes and keeping all capital spending to a minimum easyJet thinks it need only spend around £900m in FY20, £600m in FY21 and £1bn in FY22.

easyJet has been raising new cash, and through a combination of borrowing and sale-and-leaseback schemes for aircraft expects to secure additional funds of £1.9bn - £2.0bn. This will bring easyJet's total cash balance to around £3.3bn.

The group has modelled different scenarios and thinks it can endure nine months without commercial flights. Any longer and the group will need to raise more money. If the fleet is grounded for three months it is expected to cost around £1.2bn in cash, for six months around £2.2bn and for nine months around £3.0bn.

easyJet plans to release half year results (for the six months to 31 March 2020) on 30 June 2020.

Find out more about easyJet shares including how to invest

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