easyJet plc (EZJ) Ordinary 27 2/7p

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easyJet’s first-half revenue rose by 8% to £3.5bn, with all business areas contributing positively despite the less favourable timing of Easter. Airline revenue was boosted by increased capacity which more than offset softer pricing. The package holiday business grew at the fastest pace, up 29%.

Underlying pre-tax losses widened by 13% to £394mn, in line with market expectations. Higher operating costs more than offset lower average fuel prices.

Bookings for the second half improved, with 80% of third-quarter seats sold and 42% of fourth-quarter seats sold.

Free cash flow rose from £227mn to £307mn. Net cash, including lease liabilities, improved from £146mn to £327mn.

easyJet expects to deliver underlying pre-tax profits of around £703mn over the full year, in line with market forecasts. Within that, the package holiday business is set to contribute around £250mn this year.

The shares fell 2.8% in early trading.

Our view

easyJet’s first half results were good, delivering progress on almost all fronts. But markets chose to focus on some slight pricing softness in the second quarter, and the shares fell in early trading.

We think this is a bit of an overreaction from the market, given that first-half losses landed in line with market expectations. Losses over this period aren’t surprising given the cyclical nature of easyJet’s business. And bookings for the second half of the year are strong, meaning full-year targets remain on track.

We’re pleased with the underlying performance. It’s doing a great job of growing its fleet, stimulating demand, and keeping costs under control. On average, more of the available seats are being filled too. Given the high fixed costs associated with flying planes, keeping them as full as possible is key to profitability.

Selling extras to existing passengers is a key part of the success story too. So-called ancillary revenues are things like extra baggage, legroom and food. This is a highly lucrative area, and the growth has been impressive.

easyJet's ability to sell these add-ons and encourage strong demand stems from its route strategy. It focuses on profitable Western European routes within major airports. It's also invested heavily in bolstering its presence at these major airports while adding new desirable destinations to its offering. This approach sets easyJet apart from other low-cost carriers - who trim costs by flying in and out of smaller, less convenient airports.

The package holiday arm is also seeing impressive growth. Revenue and profits grew at high double-digit rates and now contribute a significant amount to the group total. Advertising spend in this segment has ramped up to help stimulate demand, which is already driving market share gains. The addressable market for package holidays is huge, and we see a long runway ahead for this segment if it can keep nailing delivery.

The balance sheet is in good shape, with substantial financial bandwidth to help support the prospective 2.7% dividend yield. If mid-term targets are hit, we think there could be room for share buybacks or special dividends. But as always, shareholder returns aren't guaranteed.

Something to consider is ongoing geopolitical tension, which has the potential to escalate and impact bookings. This hasn't dented investor sentiment, but as with any situation like this, that can change at short notice.

We think easyJet is well-placed within its sector and comes with growth opportunities, that aren’t baked into the current valuation. But there’s tough competition and geopolitical risks in the short term, so be prepared for some ups and downs along the way.

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, easyJets’s overall ESG reporting falls short of best practice.

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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