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easyJet builds capacity in poor market

Increasing costs contributed to enlarged losses at the airline
May 20, 2019

The recent results from On the Beach (OTB) and Thomas Cook (TCG) have both underlined just how challenging the travel market is at the moment. Now easyJet (EZJ) is joining the chorus, warning of a drop in per-seat revenues in the second half of the financial year.

IC TIP: Buy at 1,013p

Brexit-related uncertainty and a broader macroeconomic slowdown in Europe have both contributed to the malaise, offsetting operational initiatives such as improving its pricing algorithms and speeding up the development of product bundles. In an attempt to counter the negative macro environment, management is focusing on customer service and on-time performance. Its efforts appear to be paying off - over Easter, the group had no flight cancellations and only eight, three-hour delays from 7,300 scheduled services. But you're left with the impression that the impact of any in-house measures is negligible in the face of external factors.

However, it's not as if passenger numbers have fallen off a cliff. Around 41.6m travellers took to the skies with easyJet in the half-year, a 13.3 per cent increase on the first half of FY2018, and only slightly adrift of the rise in capacity over the same period. Hence, the load factor (capacity utilisation) was down a percentage point to 90.1 per cent - hardly a catastrophe.

The main trouble is that unit costs have been rising. The group had to contend with rising hedged fuel costs, up 7.1 per cent at constant currencies, while bearing an estimated £10m in cancellations and related passenger welfare costs due to drone disruption at Gatwick. These issues, along with inflationary cost pressures, such as higher regulated airport charges, drove the per-seat spend up 3.9 per cent.

Conversely, revenue per seat decreased by 7.4 per cent at constant currencies, though the group said top-line comparisons were skewed due to the application of the new IFRS 15 accounting standard, the cancellation of Ryanair's winter schedule in the UK, and the annualisation of prior year benefits such as Monarch's bankruptcy. 

The outlook is mixed. Management lowered guidance for constant-currency revenue per seat, now saying it will be down over the full-year. What’s more, forward bookings for the third quarter are three percentage points behind last year at 72 per cent while fourth-quarter bookings are flat at 34 per cent. Luckily, costs per seat are also expected to fall – assuming normal levels of disruption – and so the group is maintaining its adjusted pre-tax profit guidance. Broker Numis expects full-year pre-tax profits of £415m giving EPS of 83.6p,down from £578m and 117.4p in FY2018. 

EASYJET (EZJ)    
ORD PRICE:1,013pMARKET VALUE:£ 4.02bn
TOUCH:1,012-1,013p12-MONTH HIGH:1,809pLOW: 963p
DIVIDEND YIELD:5.8%PE RATIO:21
NET ASSET VALUE:633pNET DEBT:8%
Half-year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20182.18-68-13.7nil
20192.34-272-55.3nil
% change+7---
Ex-div:na   
Payment:na   
*Full-year dividend of 58.6p paid in March 2019