ii view: low-flying easyJet beats City forecasts

Shares for this low-cost airline are down by around a third year-to-date. We assess prospects.  

Third-quarter trading update to 30 June

• Revenue of £1.75 billion, up from £213 million in the pandemic hindered Q3 2021
• Loss before tax of £114 million, an improvement from a loss of £318 million a year ago
• Net debt of £0.2 billion, down from £0.6 billion in the prior second quarter
• Fourth-quarter capacity guidance unchanged

Chief executive Johan Lundgren said: 

"Delivering for customers this summer remains our highest priority. During the quarter we carried seven times more customers than the same time last year and operated 95% of our schedule. We have taken action to build the additional resilience needed this summer and the operation has now normalised.

ii round-up:

Budget airline easyJet (LSE:EZJ) today detailed losses and revenues which beat City estimates as passengers returned following major pandemic disruption and additional sales such as cabin bags rose.

The quarterly loss of £114 million was an improvement from 2021’s third quarter loss of £318 million and surpassed analyst forecasts for a loss nearer £132 million. The loss included a charge of £133 million taken for airport disruption suffered across much of Europe. 

Revenue of £1.75 billion bettered forecasts for nearer to £1.7 billion, with ancillary yield per passenger of £22.07 outperforming pre-pandemic levels and up 55% on the same period in 2019.  

easyJet shares rose by more than 1.5% in UK trading having come into this latest announcement down by a third year-to-date. Shares for Eastern European specialist budget airline Wizz Air (LSE:WIZZ) are down over 50% during 2022, while British Airways owner International Consolidated Airlines (LSE:IAG) has descended by around a fifth. The FTSE All World index is also down nearly a fifth year-to-date. 

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For the current fourth quarter, easyJet is currently 71% booked with its sold ticket yield 13% higher than the same period in 2019. It expects capacity for the fourth quarter to be 90% of the same fourth quarter period in 2019, in line with its previously lowered estimate following summer airport disruptions and staff shortages. 

Broker Morgan Stanley reiterated its overweight stance on the shares following the update, highlighting that the airline’s low net debt of £0.2 billion should help it outperform rivals going forward. 

ii view:

Luton headquartered easyJet is a short-haul European airline operating a fleet of Airbus jets. Its strategy initiatives include moving planes to airports of higher demand, growing its easyJet holidays business in partnership with major hotel brands such as InterContinental Hotels (LSE:IHG) and Accor SA (EURONEXT:AC), and retaining a strong focus on costs. 

For investors, a cocktail of a cost-of-living crisis, rising interest rates and economic uncertainty provide a tough backdrop for its customers. Business costs generally remain elevated, including for fuel, while a war in Ukraine generates heightened geopolitical tensions. Other factors outside of the airline’s control such as the weather must also be remembered. 

On the upside, management initiatives to raise ancillary, or additional revenues like baggage look to be bearing fruit. A record profit of £16 million for its easyJet holidays business was generated during the quarter, consumer appetite to travel again appears evident, while some hedging of fuel prices is being made. On balance, and with the consensus analyst estimate of fair value standing at over £6 per share, this is a share likely to appeal to investors with a high appetite for risk.

Positives: 

• Growing its holidays business
• Strong focus on costs

Negatives:

• Uncertain economic outlook
• Factors outside of management’s control like the weather can hinder performance

The average rating of stock market analysts:

Buy