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easyJet - Q3 in line but summer demand better than expected

Sophie Lund-Yates, Equity Analyst | 4 August 2020 | A A A
easyJet - Q3 in line but summer demand better than expected

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easyJet plc Ordinary 27 2/7p

Sell: 490.30 | Buy: 491.30 | Change 22.70 (4.82%)
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Overall easyJet's third quarter performance was in line with expectations, with total revenue of £7m compared to £1.8bn last year. The group reported a loss before tax of £324.5m, against a profit of £174.2m in 2019.

Having grounded the entire fleet in March, easyJet resumed flying a small number of routes on 15 June and bookings for the rest of summer are better than expected. The group's increased its schedule over the fourth quarter to fly around 40% of capacity, higher than previous guidance of 30%.

The shares rose 5.8% 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 had grounded easyJet's fleet and, while some planes are now back in the air, there's very little 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 slightly less than the previously forecast £30m to £40m in cash each week. That's a decent reduction from the c.£125m it spent during normal operations.

We don't know how long it will take for demand to fully recover, although it could be a few years. Initial demand has been better than expected, but traveller numbers are still markedly lower than normal.

Overall 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 achievable this year.

The difficulties mean easyJet is doing all it can to keep cash in the business, and that means a significant reduction in staff numbers is expected. With its end-market having shrunk so much, the size of the workforce must fall in line.

To shore up the balance sheet the group is raising more money from shareholders. While this will dilute the ownership of current investors, leaving them with a smaller piece of the pie, it does mean that they now own part of a more financially secure business - which may be worth it in the long run.

easyJet CEO Johan Lundgren has 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. However, unless most of the fleet remains grounded well into the new year we doubt easyJet will need one.

Overall there are some signs of positivity at easyJet, but it would be a mistake to assume the challenges are over. The group's doing a lot of the right things to help look after the long-term interests of the business, but the easyJet we'll be looking at once its self-help measures are complete is going to be a very different beast. And while brave investors could be rewarded for staying put, there could be further pain ahead.

Easyjet key facts

  • Current 12m forward price/book ratio: 0.9
  • 10 year average 12m forward price/book ratio: 1.7
  • Prospective yield: 0.9%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

After resuming 10 short haul routes on 15 June, easyJet flew 117,000 passengers across 709 flights in the final two weeks of the quarter as flights were allowed to resume. In 2019 this figures were 26.4m and 165,656 respectively for the quarter as a whole. The group recorded a load factor of 88.9%.

In the first month of the fourth quarter, easyJet flew around 2m customers, with a plane load factor of 84%.

Total headline costs for the quarter were £332.1m, 79% behind last year. Operational cost cash burn was lower than the £1bn expected, but this still came in at £774m for the period. To preserve cash easyJet previously announced a restructuring programme, including downsizing the organisation and reducing headcount by up to 30%.

During the quarter easyJet raised £419m from issuing new shares, which takes the total liquidity raised during the crisis to £2.2bn. This includes the total draw-down of the group's revolving credit facility, as well as borrowing from the government's Covid Corporate Financing Facility and proceeds from the sale and leaseback of aircraft.

Total gross proceeds from the leaseback programme are expected to be at the top end of the £500m - £650m guidance range.

Net debt was 78.8% higher than at the end of March at £835m.

easyJet is still unable to give detailed guidance for the full year, but expects losses in the fourth quarter to be smaller than Q3.

Find out more about easyJet shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.