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Taking Stock: Is easyJet healthier than it looks?

Decades of awful investment returns have made investors wary of airlines, but some may have just enough fuel in the tank
December 13, 2021
  • EasyJet has more fuel than investors realise
  • Airlines are turning back into monopolies

Investors contemplating the sea of red at easyJet’s (EZJ) recent full-year results could be forgiven for thinking that the idea of easyJet, or any other airline, now being an interesting contrarian investment proposition was the product of a fevered imagination. Well, this is true up to a point, but what has been noticeable in the airline industry over the past 12 months of the pandemic is that the companies have started to take the hard decisions about routes, data sharing and balance sheets that many put off when the good times rolled.

Take easyJet’s balance sheet as the opening example of how the impact of September’s £1.2bn rights issue has been positive. Granted, the rights issue might have been a case of shareholders having to cough up, or lose everything, but it has had a hugely positive effect on the balance sheet, which is why, despite the uncertainties around Covid-19, the share price has rallied since the company reported results.

To place this into context, it is worth remembering that airlines are highly seasonal businesses that need to rely on having a good summer to tide them along during the quieter winter and early spring months. Consequently, on the face of it, easyJet’s balance sheet has never looked particularly stable as it never captures the optimum moment of the company’s peak cash flow. The historic state of the balance sheet, along with the accompanying ratios, is reflected in the snapshot data below (see table.)

EASYJET KEY BALANCE SHEET NUMBERS & RATIOS
YEARCURRENT RATIOCASH & EQUIVALENTS (£bn)TRADE CREDITORS (£bn)
20121.00.640.10
20131.11.010.11
20140.90.420.13
20150.70.650.10
20160.90.710.12
20171.00.710.20
20181.01.020.32
20190.81.280.33
20200.72.280.32
20211.63.531.12
    
*Source Factset  

What the table illustrates is the essential paradox that the liquidity of easyJet’s balance sheet has never been better, at least at this point of the year. The company clearly has enough cash to pay liabilities falling within one year – trade creditors are the biggest source of these – and provided it can run some sort of service come the Spring, it can offset some of the burn with cash generated from operations. Even other key measures such as accruals, costs that have yet to be invoiced, are not much above the company’s long-term average. For easyJet, the premium is now not on what the airline can earn, but on how many of its liabilities it can pay, and for how long. With that in mind, investors have clearly taken the view that the timeline on the latter is now long enough for a recovery to happen on the former.

The return of the monopolies?

Anyone who recalls the days when airlines made serious money will remember paying double the price of a ticket from London to New York than can be found nowadays, pandemics-permitting. Relatively empty airports and a range of goodies that might include a now very collectible BOAC square leather flight bag – the original “Speed bird” bags go for decent prices online – combined with a range of fat subsidies and some cushy monopolies, meant state-owned flag carriers could basically charge what they wanted.

And, while in the depths of the current crisis those halcyon days seem further off than ever, the interesting point is not so much that times have changed in the airline industry, but in certain key respects, they seem like they are repeating themselves. Even pre-pandemic, it was becoming ever harder for airlines to turn a decent profit as margins were squeezed by discount airlines, carbon taxes, volatile fuel costs and the enormous costs of maintaining fleets of highly engineered machines. The result has been a natural coalescing around several core companies that deliver most of the flights in key economic regions like the United States – in other words, a quasi-monopoly system has evolved.

Much of this has been positive for the business on an operational level as the Covid situation has forced airlines to rationalise their operations in a way that best utilises their assets. Partly this is because of problems at other companies; while Boeing’s (NYSE: BA) woes over the 737 replacement are well reported, the manufacturing problems that are delaying the delivering of new 787 wide-bodied jets is forcing the likes of American Airlines (NASDAQ: AAL) to reduce traffic on secondary and speculative routes.

The other reason that so few companies are left is that most others have simply just disappeared into bankruptcy in a cycle that is well-known to industry observers. In fact, only one US airline, Southwest Airlines, has never filed for Chapter 11 bankruptcy protection.