easyJet plc (EZJ) Ordinary 27 2/7p
HL comment (18 July 2019)
easyJet has released a third quarter trading statement covering the three months to 30 June 2019. Revenue and cost trends are good, and existing guidance on revenue and cost remains unchanged.
The shares rose 3.5% on the news.
Airlines can be fickle friends for investors. Fortunes are influenced by lots of factors outside companies' control, including weather, terrorism and strikes. Most recently the group has been held back by intense competition and Brexit uncertainty.
Sterling fell sharply after the vote back in 2016 and remains well down versus the euro. That reduces Brits' spending power abroad. And when the UK finally goes through the EU departure gate, there could be extra travel regulations to contend with.
Hopefully this disruption won't persist into the long-term, but it's difficult to put a timeframe on when Westminster and the EU 27 will solve the Brexit puzzle.
Bankruptcies at some smaller players have helped douse the fierce competition to a degree, and the second half of easyJet's year has started well. But with rivals like Ryanair eyeing new planes with more seats, there's no guarantee more comfortable climes await. Especially since its Irish rival has a stronger record on cost control.
The fact total costs are set to increase, potentially hitting profits, looks, on first glance, bad news. And in some ways it is, especially since the dividend is tied directly to earnings, meaning investors can expect the payout to be cut by around 25%.
However, that's mostly due to the rising cost of fuel, a major and unavoidable cost. What's encouraging is that after little progress in recent years, the group's finally confident of squeezing non-fuel operating costs per seat down. That's important because while economic conditions and oil prices swing from headwinds to tailwind and vice versa, a well-managed cost base has longer-term benefits.
A strong balance sheet, helped by the fact 69% of the total fleet is owned outright, is another plus. But we don't think the group is out of the woods yet.
Uncertainties linger around the implications of the UK's exit from the EU, and customer sentiment remains weak. easyJet will need to show it can keep delivering on cost control.
Those uncertainties likely explain why the shares trade at a discount to their longer-term average on a price to book basis, and are set to offer a prospective yield of 4.6% this year.
Third quarter results
Further capacity growth supported an 8% rise in passenger numbers, to 26.4m while a 14.3% increase in ancillary revenues, to £374m, and a firmer stance on pricing ensured underlying revenue per seat rose 0.7%. The overall effect was that revenue rose 11.4% to £1.8bn.
While extra capacity and higher fuel costs meant overall costs increased, underlying costs per seat fell 4% on account of better efficiency, lower employee incentives and fewer cancellations and delays.
Looking ahead, the group's guidance remains broadly unchanged. easyJet expects capacity to grow by around 7% in the second half, and revenue per seat to decline slightly. The group says headline full year profits are expected to be between £400m and £440m, in line with market expectations.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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