easyJet well set for summer as winter losses narrow

easyJet (LSE:EZJ) has made measurable progress in reducing its seasonal and traditional winter losses and is now well set for a busy and profitable summer period.

An expected pre-tax loss of between £340 million and £360 million would represent an improvement of around £50 million from the previous year, driven by capacity growth and the benefits of productivity improvements. This comes alongside an increase of 18% in fuel costs, adding 6% inflation per seat, largely resulting from the escalations of tensions in the Middle East.

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The group had previously reported that there was some general nervousness which prevented some passengers from flying due to the conflict and that there had been a direct impact of £40 million to profits. Despite the ongoing tensions, the impact is marginal in terms of the overall picture, with the limited 0.3% of capacity now being deployed elsewhere as flights to Israel have been suspended for the summer.

Even so, these developments are an unfortunate reminder of why the airlines have historically been such a difficult sector in which to invest. External factors outside of the industry’s control have ranged over the years from pandemics to conflicts to volcanic ash clouds, let alone the possibility of strike actions affecting operating conditions. 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.

The group expects revenue for the half-year to have increased by 22% to £3.27 billion, with revenue per seat growth of 5% boosted by a spike of 8% in the second quarter. In terms of overall income, the group has seen a true profitable benefit from ancillary revenues, which include the likes of customer payments for personally allocated seats, baggage and food and which now account for 30% of sales, with the price of the flight ticket representing the balance.

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The number is also likely to be underpinned by another strong contribution from easyJet holidays, which has all but come from a recent standing start to now represent 10% of group revenues. An expected pre-tax profit of around £31 million would represent a jump of more than 200%, with spikes in revenue and customer growth of 79% and 42% respectively, with the latter estimated to continue expanding at similar levels.

Indeed, the launch of the holidays unit seems to have come at the right time, with cost-conscious consumers searching for value packages, and the group has high hopes for the unit’s longer-term contribution to overall profits.

Passenger numbers and capacity both increased by 8% over the period, with a load factor which remained consistent at 87%. Bookings for the summer are already 70% sold as easyJet enters the most profitable part of the trading year, which should in turn comfortably push the group into surplus for the year as a whole.

Meanwhile, the planned capacity growth and expansion of choice should leave the company in a commanding position in its space over the peak period. In the meantime, there has also been a sharp improvement in terms of balance sheet strength, with the group holding net cash of £146 million at the end of March, as compared to net debt amounting to £485 million at the end of 2023.

Aside from the conflict in the Middle East, there remains the possibility that the consumer will again batten down the hatches on discretionary spend. That being said, there seems to be an increasing body of evidence to suggest that the family holiday remains almost sacrosanct and outside of normal budgetary restraints.

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The share price has reflected the volatile swings which inevitably track the sector. Over a five-year period, the shares are down by 49%, during which time easyJet saw both relegation from and promotion to the FTSE100 in 2019. The group was relegated again in June 2020 as the pandemic struck its blow, finally regaining its status in the premier index last month.

Of late, the performance has been equally turbulent, with a 33% hike in the share price over the last six months just enough to lift the performance over the last year to an increase of 1%, as compared to a dip of 0.8% for the wider FTSE100 index. The initial reaction to the update is positive based on both immediate and medium-term prospects, which will in turn do little to trouble the current market consensus of the shares as a 'buy'.