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Clear skies for easyJet

The budget airline has increased its profit forecasts for 2017-18 despite added costs from air traffic controller strikes and the integration of new airport slots in Berlin
August 16, 2018

It’s a turbulent time for Europe's airlines. More capacity has made competition intense, with some operators finding they have little control over prices. Some budget airlines have felt the squeeze to the point of bankruptcy, such as Air Berlin and Monarch last year. Brexit will pose further challenges. Against such a backdrop, it is crucial that investors pick the right stock. We think that easyJet (EZJ) looks well placed to weather the turbulence.

IC TIP: Buy at 1560p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Management upgraded profit forecasts
At the resilient end of the market
Relaxed about Brexit
Load factor high and rising

Bear points

Problems at Berlin airport
Exposed to air traffic controller strikes

Last month’s third-quarter update demonstrated that even when times get tough, easyJet can still deliver an earnings upgrade. Management increased expectations for pre-tax profit for the year to September 2018 to between £550m and £590m, from the previously flagged range of £530m to £580m. Analysts at broker Liberum expect easyJet to deliver at the top end of this guidance. Most impressively, this is in spite of a number of cost headwinds.

First was air traffic controller strikes in France, which look like costing easyJet around £25m for disruption, contributing to a 4 per cent increase in non-fuel costs during the third quarter. The group is also losing money on opening new slots at Berlin's Tegel airport, which it took over from the now-collapsed Air Berlin. These are expected to cost £175m for the full year, compared with £160m previously indicated, due to weaker revenue per available seat than previously indicated. The group is overhauling the schedule and should break even on these slots by 2019, becoming profitable thereafter. At the end of May easyJet had net cash balances of £665m, so it is well placed to withstand any financial shocks from strikes, or perhaps to buy more airport slots.

Apart from these added costs, easyJet is doing well. In the third quarter of 2017-18 it carried 24.4m passengers, a 9 per cent increase on the previous third quarter, helping to increase its load factor – the proportion of seats filled – by 0.3 percentage points to 93.4 per cent. The latest passenger statistics show that load factor is now up to 93.6 per cent for the 12 months to July. And more passengers are paying for extras such as food on board or checked bags, driving ancillary revenue up by a fifth to £328m. Overall group sales were up 14 per cent in the third quarter to £1.6bn.

The group has an air-operator certificate based in Austria, so its bosses say they are prepared for any form of Brexit. Besides, easyJet operates at the budget end of the market, so it could benefit as some travellers trade down from the high-end airlines as their spending power gets squeezed. Meanwhile, millennials are keen travellers, and are likely to pick the budget option when flying.

Its closest competitor would arguably be Ryanair (RYA), but put the two beside each other and the comparison is stark. The latter has cut its forecasts and has endured analysts' downgrades as its staff continue to strike over working arrangements. Pilots' strikes and flight cancellations have been well publicised and, where feasible, Ryanair's problems might encourage travellers to choose easyJet over its rival. 

EASYJET (EZJ)   
ORD PRICE:1,560pMARKET VALUE:£6.2bn
TOUCH:1,559-1,560p12-MONTH HIGH:1,809pLOW: 1,136p
FORWARD DIVIDEND YIELD:4.5%FORWARD PE RATIO:11
NET ASSET VALUE:668pNET CASH:£665m
Year to 30 SepRevenue (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20154.6268613955.2
20164.5950711153.8
20175.054088340.9
2018*5.6155211155.1
2019*6.1067014069.6
% change+9+21+26+26
Normal market size:1,000   
Matched bargain trading    
Beta:0.3   
*Liberum forecasts, adjusted PTP and EPS