easyJet plc (EZJ) Ordinary 27 2/7p
HL comment (25 June 2020)
easyJet made a first half pre-tax loss of £353m, compared with £272m last year. This included a £160m loss relating to fuel hedges, which were rendered ineffective by COVID-19. Excluding this easyJet lost £193m, compared with £275m last year.
easyJet expects capacity to reach 30% of pre-COVID levels in the final quarter. Management expects costs per seat to be flat, but refrained from giving detailed guidance given ongoing uncertainty.
easyJet has also committed to raising around £419m by issuing new shares, equal to 14.99% of its existing issued shares. These new shares will be sold for 703p each, a 5% discount to the closing share price on 24 June.
The shares fell 6.1% in early trading.
Airlines are in a very tough spot at the moment.
Government travel bans had grounded easyJet's fleet and, while some planes are now back in the air, there's very little cash coming in but the group still has large costs to pay.
After taking a number of cost saving actions, easyJet says it's currently burning through slightly less than the previously forecast £30m to £40m in cash each week. That's a decent reduction from the c.£125m it spent during normal operations.
We don't know how long it will take for demand to fully recover, although it could be a few years. A quick surge of late holiday's would be ideal from easyJet's perspective, but a second wave of infections or prolonged restrictions could put the group under severe pressure.
Nonetheless the current crisis will leave easyJet badly scarred. To put the current rate of cash burn in perspective, easyJet made £430m in profit before tax last year, and £445m the year before. Airlines typically lose money over the winter before aiming to turn a large profit over the summer to compensate. That looks unlikely to be achievable this year.
To shore up the balance sheet the group is raising more money from shareholders. While this will dilute the ownership of current investors, leaving them with a smaller piece of the pie, it does mean that they now own part of a more financially secure business - which may be worth it in the long run.
easyJet CEO Johan Lundgren has said the industry faced a "precarious future" and one in which government help would be essential. While easyJet will benefit from measures the government has already announced, including wage support for furloughed workers, the Chancellor has ruled out a sector wide bailout for airlines. Individual deals could be on the table as a last resort but investors should expect them to come with onerous terms attached. However, unless most of the fleet remains grounded well into the new year we doubt easyJet will need one.
Despite the emergency action easyJet's not out of the woods yet. While brave investors could be rewarded for staying put over the long run, the sector faces real risks and there could well be further pain ahead.
- Price to book ratio of 1.0
- 10 year average price to book ratio of 2.0
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First half results for the year ending 31 March 2020
Revenue increased 2.2% to £2.4bn, ignoring the impact of exchange rates. That reflects a 10.2% increase in revenue per seat to £55.87 which was driven by the group's focus on ancillary revenue such as baggage charges and allocated seating.
The group also benefited from the bankruptcy of Thomas Cook last year. Growth was offset by a 7.6% fall in capacity, largely due to COVID-19 travel restrictions in March, strikes in France and bad weather.
At constant currency, headline costs per seat increased 7.2% to £60.75. Excluding fuel, costs per seat increased 9.5% to £47.80. The increase was driven by COVID-19 related costs and higher maintenance and ownership costs for planes, pay increases for staff and inflated airport costs.
As of 31 March easyJet had £467m in net debt, made up of £1.4bn in cash and £1.9bn in debt. Since then easyJet has raised a further £1.7bn in liquidity, with an extra £200m to £350m expected. This has been done by fully drawing down on the group's revolving credit facility, borrowing (including through the government's Covid Corporate Financing Facility) and by selling some planes and leasing them back.
After renegotiating with suppliers, including deferring the delivery of new planes, easyJet now expects capital expenditures to be £400m in the second half of this financial year and £600m for next year.
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