easyJet shares recover from dive after bullish Q3 update

easyJet (LSE:EZJ) is set fair as the peak summer season gets into full swing, with progress across each of its revenue streams and indeed at the headline profit level.

Adjusted pre-tax profit of £236 million for the quarter ended 30 June represents an increase of 16% from the previous year, and is ahead of the estimated figure of £219 million.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

This result was underpinned by revenues of £2.63 billion, an increase of 11% on the corresponding period and in line with expectations. Within this number, passenger revenue (which accounts for 61% of the group total) rose by 7%, but the other strands of the group’s income are showing promising signs of making an increasingly valuable contribution to the group’s fortunes.

Ancillary revenues, which include the likes of customer payments for personally allocated seats, baggage and food, now account for 26% of sales and grew by 11% over the period.

Of equal interest is the performance of easyJet holidays, which has all but come from a recent standing start to now represent 13% of group revenues. A pre-tax profit of £73 million compares to £49 million a year before, with revenues rising by 42% and passenger growth of around a third.

As such, easyJet has upped guidance for the unit to make a full-year profit contribution in excess of £180 million, which would itself equate to 48% growth. Indeed, the launch of the holidays business seems to have come at the right time, with cost-conscious consumers searching for value packages, and the group has high hopes for its longer-term contribution to overall profits.

• Stockwatch: three shares to buy after industry warning
• DIY Investor Diary: 10 private investors share their top tips
• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis

Passenger numbers and capacity are also on the up, with revenue per seat having nudged ahead by 1% despite the recent travails seen elsewhere in the sector. The load factor continued at a consistent 90%, with easyJet noting that it had sold 1.5 million more seats than the previous peak summer period and that it was nearing a full-year capacity of 100 million seats, with 69% of the final quarter already sold.

At the same time, planned capacity growth and expansion of choice seems to have left the company in a commanding position in its space over the peak period. In addition, there has also been an improvement in terms of balance sheet strength, with the group holding net cash of £456 million, which compares to £146 million at the end of March.

In terms of outlook, the group noted that capacity on sale for the next financial year would increase by 5% and that 20% of the holiday programme has already been sold. Shorter term, revenue per seat growth in the final quarter of this year is expected to continue the trend seen in the third.

Indeed, there seems to be an increasing body of evidence to suggest that the family holiday remains almost sacrosanct and outside of normal budgetary restraints, which has played into the hands of easyJet and its keenly priced offerings of flights and holiday packages. Its network of destinations are usually convenient and difficult for some of its competitors to mirror, while the group has also managed to keep a relative lid on its prices.

Despite the undoubted progress which the group has made, recent developments such as the global technology outage and the read across from weak Ryanair numbers (which do not seem to have troubled easyJet in the same way) are an unfortunate reminder of why the airlines have historically been such a difficult sector in which to invest.

These issues add to a litany of external factors outside the industry’s control, which have ranged over the years from the possibility of strike actions to conflicts and volcanic ash clouds, let alone the major shock which the pandemic brought. Nonetheless these factors are a cost of doing business and there are many other signs that easyJet is making a strong comeback given the most recent headwinds of the pandemic.

• What the City thinks of L&G and Aviva shares right now
• 10 hottest ISA shares, funds and trusts: week ended 19 July 2024
• The Week Ahead: Lloyds Bank, NatWest, Vodafone and BT

Unfortunately the share price has not reflected this turnaround, and the shares remain down by 38% over the last three years. In the last year the price has fallen by 10%, as compared to a gain of 6.4% for the wider FTSE 100. They'd fallen 13% in the last week alone prior to this statement, which leaves easyJet at threat of relegation yet again from the FTSE 100 at the next reshuffle in September.

Even so, the strong share price reaction to this update at the open adds to investors remaining defiantly confident that sunnier times are returning and that the group is on a strong flight path. As such, the market consensus of the shares as a 'buy' reflects optimism for the longer term.