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easyJet - things will get worse before they get better

Nicholas Hyett, Equity Analyst | 28 January 2021 | A A A
easyJet - things will get worse before they get better

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easyJet plc Ordinary 27 2/7p

Sell: 496.60 | Buy: 498.40 | Change -64.60 (-11.45%)
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Revenue for the first quarter came in at £165m, an 88% decline from the previous year. That reflects an 87% fall in passenger numbers to 2.9m.

The group flew 18% of 2019 capacity in the quarter, broadly in line with management's expectations. easyJet is expecting to fly 10% of 2019 capacity in the second quarter, and offered no further guidance due to the uncertain environment.

The shares fell 2% following the announcement.

View the latest easyjet share price and how to deal

Our View

Airlines are in a tough spot right now, and easyJet is no exception. The pandemic has all-but erased air travel and the high costs associated with keeping easyJet afloat are chipping away at liquidity.

The longer COVID lockdowns drag on, the worse it will get. Capacity is out of the group's control for now, leaving cost cutting as the only lever for management to pull.

Some of those changes, like reductions in fuel usage, will benefit the organization when things return to normal. Others, like staff cuts, have the potential to cripple the airline when things return to normal. Management believes it will have the flexibility to spring into action to capture pent-up demand, but we're sceptical. While that may be true today, another summer season lost to travel restrictions could lead to further staff reductions and route changes that are more difficult to reverse.

If there's any bright side to easyJet's current predicament, it's that the firm has been able to secure enough liquidity to get through the near-term. At last check, the group had access to £2.5bn to carry it through the latest bout of lockdowns. That security net came at a price, though, including a government loan with restrictive terms that will limit dividend payments in the future.

While vaccine rollouts are the key to recovery among airlines, the virus itself isn't the only risk for the sector. A prolonged economic downturn in the wake of the pandemic could slow the speed of air travel recovery. While easyJet's status as a short-haul, low-cost airline makes it less vulnerable than some of its peers, the group would still suffer if people postpone their holidays abroad to save money.

We acknowledge easyJet's stronger-than-average position within the sector, but our optimism ends there. The air travel industry is still rife with risk and we believe investors should take a cautious, wait-and-see approach with airline stocks--easyJet included.

Easyjet key facts

  • Price/Book ratio: 1.7
  • Ten year average Price/Book ratio: 2.1
  • Prospective yield: 0.7%

All ratios are sourced from Refinitiv. 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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First Quarter Results

easyJet has cut its weekly cash burn in a fully grounded scenario to around £40m. The group's cost saving efforts meant headline costs fell 58.9% to £588m in the quarter (52% excluding fuel and currency changes). Included in this restructuring effort is a 30% reduction in employee numbers and fuel efficiency measures which have cut fuel usage by c.1.5%.

Management believes the pared down organisation retains "the flexibility to ramp up to capture [pent-up] demand." According to a customer survey conducted by the group in January, roughly three quarters of its existing customers are planning a trip in 2021.

The group took out a new five-year term loan facility worth £1.4bn, which brings the total raised since the start of the pandemic to £4.5bn. After repaying and cancelling some of the group's shorter-term debt, easyJet had access to £2.5bn worth of liquidity as of 25 January.

Management said Brexit had no operational impact on easyJet's business. To cope with EU ownership and control requirements, the board has capped the proportion of shares with voting rights at 49.5%. At the start of January, 52.65% of shares were held by non-EU investors. The group will suspend voting rights for some of those shares on a 'last-in, first-out' basis. Non-EU investors are still permitted to buy easyJet shares, but newly issued shares won't carry voting rights.

Find out more about easyJet shares including how to invest

A Non-Executive Director of Hargreaves Lansdown plc is also a Non-Executive Director of easyJet.

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 Refinitiv. 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 for more information.