easyJet plc (EZJ) Ordinary 27 2/7p

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easyJet’s first-quarter revenue rose 11% to £2.3bn. Growth in its Airlines business was driven by increased capacity and fuller planes. The Holiday business saw revenue climb 26% higher, helped by double-digit customer growth.

Underlying pre-tax losses widened from £61mn to £93mn, reflecting increased investment to set up new strategic bases in Milan and Rome.

Net debt improved from £0.5bn to £0.1bn.

Bookings for the second quarter are up two percentage points, and second half bookings are up one percentage point on the prior year.

The full-year outlook remains unchanged, with capacity set to expand by around 7%. Holiday customers are expected to grow by up to 15%.

The shares rose 2.4% in early trading.

Our view

easyJet’s top line continued to climb higher over the first quarter, helped by increased capacity, strong demand and impressive growth in its package holiday division. Continued investments in setting up new strategic hubs in Milan and Rome meant that losses widened in the period. But with almost all other metrics trending in the right direction, markets reacted positively on the day.

The no-frills airline is 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.

Easing fuel prices are a big tailwind. Fuel is a huge cost for airlines, equivalent to around 23% of revenue for easyJet. With fuel hedges being rolled over at lower prices, there should be a continued benefit to the bottom line for the next year or two.

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. This approach sets easyJet apart from other low-cost carriers that trim costs by flying in and out of smaller, less convenient airports.

The package holiday arm continues to deliver impressive growth. Revenue is growing at high double-digit rates and pre-tax profits have hit targets ahead of schedule, now accounting for more than a third of the group’s total. Given that the addressable market for package holidays is huge, 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 3.0% dividend yield. If recently upgraded 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 the current investment plans bring increased operational risks in the short 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.

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.

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.

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