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easyJet - Losses as expected

Nicholas Hyett, Equity Analyst | 20 July 2021 | A A A
easyJet - Losses as expected

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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: 554.20 | Buy: 555.40 | Change -1.80 (-0.32%)
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easyJet reported a pre-tax loss of £318m in the three months to 30 June, in line with expectations and an improvement on the £346.8m loss in the same period last year.

The group flew 3m passengers during the period with capacity of 4.5m, 17% of 2019 levels. Capacity is forecast to reach 60% of 2019 levels in the next quarter, the bulk of which will be intra-EU flights.

Total cash burn during the quarter was £55m, with fixed costs plus capital expenditure coming in at £34m per week on average, below guidance for £40m.

The shares were broadly flat 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. While third quarter cash burn came in below expectations, no amount of belt-tightening can keep the high costs of operating an airline from chipping away at liquidity.

Thus far, management's been successful in meaningfully reducing costs. Some of those changes, like fuel efficiencies, will benefit the organisation when travel starts to re-open. Others, like staff cuts, have the potential to slow recovery when things return to normal. Management has also had to be ultra-flexible to capture demand as it springs up, and shift down when restrictions are re-imposed. Operating empty planes isn't worth the added cost, but the group desperately needs to cobble together some semblance of a summer season.

To sidestep the on-again off-again UK restrictions, easyJet is focusing on internal EU flights where travel is flowing more freely. For now, this makes sense, but we're concerned that the UK won't be the only country to turn the travel tap on and off this summer if Covid worries continue. easyJet's status as a short-haul, low-cost airline makes it less vulnerable than some of its peers. But that doesn't mean the group is immune to the wider industry's woes.

The bright side for easyJet is that the firm has been able to secure enough liquidity to get through the near-term. The group has access to £2.9bn of liquidity going into the summer. That security net came at a price, though, including a government loan with restrictive terms that will limit dividend payments in the future.

We acknowledge easyJet's stronger-than-average competitive 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: 1.85
  • 10 year average Price/Book ratio: 2.16
  • Prospective dividend yield (next 12 months): 0.4%

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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Q3 Trading Update

easyJet reported revenue of £212.9m, up from £7.2m in 2020. That reflected an increase in both passenger revenue (£151.9m) and ancillary revenue (£61m). The group continued to see per-passenger spend on extras like premium seating and baggage allowance rise as a percentage of total revenue.

The resumption of some flights meant headline costs rose to £531.2m from £354.0m in 2020. The group also paid £122m in customer refunds during the period, bringing the total cost of pandemic refunds to £1.2bn.

easyJet's cost saving programme is on track to deliver £500m worth of savings this year, half of which should be sustainable as conditions normalise.

So far 49% of the group's schedule in the current quarter has been booked, compared to 65% in 2019, but customers are now booking much closer to their departure dates due to changing restrictions.

The pandemic's caused easyJet to reduce its fleet by 10%, but the group will begin taking delivery of more efficient A320neo aircraft in the autumn, eventually growing its fleet to 317 aircraft in 2022.

As at 30 June 2021, easyJet had access to £2.9bn in cash and loans. The group will have to pay back £300m worth of UK government loans in November, but has no other repayment obligations until 2023.

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.