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easyJet - capacity improving, profits fall from disruption

Third quarter revenue rose to £1.8bn from £213m last year, reflecting strong increases across passenger and ancillary revenue.

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Third quarter revenue rose to £1.8bn from £213m last year, reflecting strong increases across passenger and ancillary revenue. easyJet incurred £133m in costs from flight cancellations caused by capacity and staffing shortages in the aviation industry, meaning there was a reported pre-tax loss of £114m. Although this was a £204m improvement on last year.

The group flew 87% of pre-pandemic capacity and expects this to rise to 90% next quarter.

The shares were unmoved following the announcement.

View the latest easyjet share price and how to deal

Our View

It's easy to be swept away by news of cancellations and airport disruption. Of course, it's disheartening to see the path to profits pushed further into the future, but we think easyJet has some fundamental strengths for those prepared to accept some ups and downs in the short-term.

Capacity is expected to be within a whisker of pre-pandemic levels by the end of the year. Heightened demand from people desperate to get away after years banned from the skies have rejuvenated performance. Added to that, planes that do take off are reasonably full, meaning costs-per-head are coming down.

And away from how many flights are in the air and how full they are, easyJet has proved it's incredibly successful at squeezing more revenue from existing custom.

So-called ancillary revenue (the extra add-ons like luggage, food or legroom) have had a jet-fuelled rise. This may well be caused by a new mentality sparked by the fact so many people haven't had a foreign holiday in years, and how sticky this elevated demand will be, is not yet known. On balance, we think this is a strong growth lever when looking at the long-term.

As is easyJet's route strategy. The group focuses on profitable Western European routes within major airports. It's also invested heavily in bolstering its presence at these major airports and improving its routes. It's an approach that sets easyJet apart from other low-cost carriers - who trim costs by flying in and out of smaller, less convenient airports. A focus on short-haul travel puts easyJet in a better position than its long-haul rivals too, when it comes to capturing returning passengers who are looking for a quick jaunt to the sun rather than a business trip to New York.

Being a lower-cost option is also beneficial as the cost-of-living crisis surges. While a sharp economic downturn will hurt all airlines, for now, a convenient, reasonably priced option is better placed than some other carriers in our view. That doesn't dispel all lingering uncertainty though. And recent airport disruption may have put some people off travelling for now. Foreign trips could find themselves rubbed off shopping lists.

Cost savings have been significant and following the right's issue, net debt is at a level we're comfortable with. That said, dividend payments aren't a priority just yet. We don't see the group needing extra funding from shareholders anytime soon though.

All airlines in the current environment come with an element of increased risk. That risk is reflected in easyJet's current valuation. We think the group is well-placed within its sector, and comes with growth opportunities, but only for those prepared to take a long-term view and stomach some turbulence along the way.

easyJet key facts

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.

An independent Non-Executive director of Hargreaves Lansdown plc is also an Independent Non-Executive Director of easyJet plc.

Third Quarter Trading Update

Revenue was boosted as total passenger numbers of 22m was over seven times higher than the same period last year. Planes were 88% full on average, which was in-line with expectations.

Passenger revenue rose by £1bn to £1.2bn, while ancillary revenue (additional extras like luggage, food and legroom seats) rose almost ten-fold to £603m, as the amount generated per-customer was 55% ahead of pre-pandemic levels.

Next quarter is 71% booked, with load factor (a measure of how full the plane is) trending above pre-pandemic levels, and ticket yields are 13% up.

The group is around 83% hedged for fuel next quarter and 60% for the first half of the next financial year.

As at 30 June 2022, easyJet's net debt was £0.2bn (31 March 2022: £0.6bn), and the group pointed out it "has one of the lowest net debts in European aviation".

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th July 2022