easyJet’s first-half underlying revenue and costs were in line with group expectations. However, this excludes £25mn of additional fuel costs due to the Middle East conflict, and £30mn increase in legal provisions tied to historical cases.
Customer numbers at easyJet holidays increased 22%, while load factor (how many seats were filled) rose two percentage points to 90%.
Bookings for the second half fell by two percentage points, with 63% of third-quarter seats and 30% of fourth-quarter seats sold.
The net cash position stood at £434mn at period-end.
Including the increased fuel and legal costs, easyJet now expects to report a first-half underlying pre-tax loss of £540-560mn, much worse than market forecasts of £421mn.
The shares fell 5.8% in early trading.
Our view
In a short trading update, easyJet revealed that demand and operational performance improved over the first half. But the recent spike in fuel costs means first-half profits are likely to land well below market forecasts. Alongside a softer demand outlook for the rest of the year, the shares fell on the day.
easyJet’s been doing most things right of late. The no-frills airline has been upgrading its fleet to newer, more efficient planes, stimulating demand well, and setting up new strategic hubs in popular locations like Milan and Rome. On average, more of its available seats have been getting filled too.
Selling extras to existing passengers is also a key part of the game plan. So-called ancillary revenues are things like extra baggage, legroom and food. This is a highly lucrative area, and recent growth has been impressive.
The package holiday arm continues to deliver strong growth. Revenue has been growing at high double-digit rates and pre-tax profits have hit targets ahead of schedule, accounting for more than a third of the group’s total at the last count. Given that the addressable market for package holidays is huge, there’s big growth opportunity ahead for this segment if it can keep nailing delivery.
It might seem obvious, but non-airline businesses like package holidays provide a valuable hedge in tough times. It’s an asset-light segment – easyJet doesn’t own the hotels or resorts it delivers passengers to. So if demand falls, easyJet’s variable costs fall by almost the full amount too.
Then there’s the big issue – fuel. easyJet operates with single-digit margins and historically spends around 25% of its revenue on fuel. That makes it one of the more sensitive European airlines to fuel price fluctuations, and the recent spike in fuel prices is taking a big toll on profitability. Even if the Middle East conflict is resolved in the near term, fuel prices are likely to remain high for some time. As a result, we expect this year's and next year’s profits to come in well below 2025 levels.
This comes at an inconvenient time. easyJet is in the middle of upgrading its fleet – an expensive endeavour. Granted, the balance sheet is currently one of the strongest in the sector. But with free cash flows now forecast to turn negative for the next few years, debts look set to stack up. While this is manageable, it means dividends and share buybacks will likely take a hit.
While easyJet’s been operating well across multiple fronts, the benefits to the bottom line are being overshadowed by higher fuel prices and a more unfavourable macroeconomic backdrop. The asset-light Holidays business offers some resilience, but with the group’s financials set to weaken, we see limited scope for upside in the near term.
Environmental, social and governance (ESG) risk
The transport industry is medium risk in terms of ESG, with European firms managing them better than others. Carbon emissions, product governance, and quality & safety are the biggest risk drivers. Other key areas are emissions, effluents & waste, labour relations, and employee health & safety.
According to Sustainalytics, easyJet’s management of ESG risk is strong.
Its policy addressing environmental issues is very strong and executive remuneration is explicitly linked to sustainability performance targets. An adequate whistleblower policy is also in place. However, easyJet’s overall ESG reporting falls short of best practice.
easyJet key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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 LSEG. 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.
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