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easyJet - more details on resumption of flights

Nicholas Hyett, Equity Analyst | 28 May 2020 | A A A
easyJet -  more details on resumption of flights

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easyJet plc Ordinary 27 2/7p

Sell: 987.80 | Buy: 988.40 | Change 14.20 (1.46%)
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easyJet will resume flying on 15 June, focussing mainly on domestic flights in the UK and France. easyJet expects to offer around 30% of last year's flights, in the three months to the end of September. Bookings for the winter season are "well ahead" of last year, although this includes cancelled flights from earlier in the year.

easyJet expects its 2021 fleet to be comprised of 302 planes, 51 less than previously expected, as new aircraft deliveries are delayed and leased aircraft returned. Demand is not expected to fully recover until 2023.

The group plans to reduce staff numbers by 30% and is renegotiating with external suppliers. easyJet expects to raise roughly £2.0bn through previously announced borrowings and sale & leaseback schemes for aircraft.

The shares rose 7.8% following the announcement.

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, although the group is planning to get the fleet back into the air in a limited way pretty soon. And while a nine month period with very limited flights is certainly possible, the return is still reassuring.

Nonetheless the current crisis will leave easyJet badly scarred. To put the current rate of cash burn in perspective, easyJet made £430m in profit before tax last year, and £445m the year before. Airlines typically lose money over the winter before aiming to turn a large profit over the summer to compensate. That looks unlikely to be the case this year.

The balance sheet is 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 would 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 it may be worth the pain.

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 most of the fleet remains grounded until January we don't think easyJet will need one, but it's something investors should keep an eye on.

Despite the emergency action easyJet's not out of the woods yet. While investors could be rewarded for staying put over the long run, there could well be further pain ahead. Positive news has boosted sentiment recently, but it's still too soon to say what'll happen next.

Register for updates on easyJet

First half trading update

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."

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.

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.

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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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.