easyJet plc (EZJ) Ordinary 27 2/7p
HL comment (20 June 2022)
Ongoing disruption means easyJet has downgraded expectations. It now expects third quarter capacity to be around 87% of pre-pandemic levels, down from expectations of 90%, building to 90% for the final quarter. This, together with increased investment to improve operations, means easyJet will exceed its underlying cost guidance for the full year.
Flight cancellations are being caused by staff shortages, air traffic control delays, increased turnaround times and flight caps at some airports. The group's decided to consolidate a number of flights, and hopes most customers can rebook on separate flights with the same departure date.
easyJet highlighted that demand for travel has returned strongly, with fourth quarter bookings roughly in-line with 2019.
The shares fell 3.5% following the announcement.
easyJet has been forced to scale back capacity, as a reduced workforce struggles to meet the demand of returning travellers. This is not a good look for the airline, at a time that's meant to be about rebuilding resilience after the pandemic.
While this is very far from ideal, it's not a total derailment of easyJet's recovery. Capacity is still expected to be within a whisker of pre-pandemic levels by the end of the year. The biggest question from shareholders should instead be on how closely easyJet controls the extra costs caused by the disruption. But while this all works out, investors shouldn't forget where things stand, once the big picture is considered.
easyJet's had more than its fair share of ups and downs in the last couple of years.
Proceeds from the £1.2bn rights issue helped the group stomach disruptions, but it also gave easyJet the ability to increase its presence at major airports, investing in easyJet holidays and growing its ancillary product (things like extra baggage allowance, leg-room seats and food) portfolio.
This is a continuation of the existing strategy - focusing on profitable Western European routes within major airports. 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. And these efforts are paying dividends, with big boosts to ancillary revenue supporting the top line at the half year mark.
A focus on short-haul travel puts easyJet in a better position than its long-haul rivals when it comes to capturing returning passengers. UK beach and leisure routes look set to benefit from pent up travel demand in the aftermath of Omicron, and that shows. Passenger numbers are now well beyond last year.
Cost savings have been significant too 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.
The group's also confident that the cost-of-living crisis isn't touching performance. It was quick to point out that holidays are more important to people these days, after two years without travel abroad. This idea does ring true to some extent, but there's no getting away from the fact that if faced with a recession, a holiday - whether a hop down the road or a city break to Prague, simply isn't going to happen for millions of people. This isn't a flashing red indicator at this juncture, but it's something to keep one eye on.
Overall, it's still a touch too early to say that the hard times are over for easyJet, with work still to be done on getting operations back into full health, and the risk of a steep economic downturn lingering.
easyJet key facts
- Forward price/book ratio: 1.25
- Ten year average forward price/book ratio: 2.23
- Prospective dividend yield (next 12 months): 2.2%
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.
First Half Results (19 May 2022)
Half year pre-tax losses were £545m, compared to £701m last year. That was at the better end of expectations, and reflects an increase in revenue from £240m to £1.5bn. Capacity was 30.3m seats, up significantly on 6.4m last year.The group said: ''Despite the rise in living costs, consumer research suggests there is still strong appetite to travel due to pent up demand and people topping up savings during the pandemic. 1 in 2 respondents in the UK say limited opportunities to travel during the pandemic has made their holidays more important to them than before''.
Passenger revenue rose to £985m, up from £170m. That comes as passenger numbers rose almost six-fold to 23.4m, and planes were 77.3% full on average, compared to 63.7%.
Ancillary revenue rose even faster, reaching £513m from £70m.
Underlying costs, excluding fuel, rose 94.2% to £1.7bn. That reflects the costs associated with ramping up capacity. easyJet is around 71% hedged for fuel in the second half, and 49% for the first half of the next financial year.
The easyJet Holidays business has seen a 500%+ increase in summer bookings, and 70% of planned 2022 capacity has been sold.
The group decided against offering official forward guidance, saying: ''At this stage, given the continued level of short-term uncertainty, it would not be appropriate to provide any further financial guidance for the 2022 financial year. Customers are booking closer to departure and visibility remains limited.''
The group generated £207m of free cash flow, compared to an outflow last year. Net debt fell £0.3m, to £0.6m.
One of HL's non-executive directors is also a non-executive director at 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.
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