EasyJet heads back toward cruising altitude

A lower loss than a year ago, increased passenger numbers and revenues per customer and guidance for higher-than-expected profits for the full year all suggest that easyJet is finally emerging from three, storm-filled years.

If chief executive Johan Lundgren’s profit forecast proves accurate, easyJet will be in the black on an annual basis for the first time since the financial year that ended in September 2019, although from an investor’s perspective, there is still a lot of work to be done as the shares (and annual profits) actually peaked way back in 2015.

Source: Company accounts. Financial year to September

Mr Lundgren seems confident that full-year pre-tax income will exceed the current market consensus of £126 million. Robust demand, good cost control (which includes fuel hedging), new route additions and gathering customer interest in easyJet Holidays are all helping the airline emerge from the doldrums caused by the pandemic and seemingly hold at bay concerns about a recession, sagging consumer confidence and a relatively lofty oil price.

Source: Company accounts. Financial year to September

An improved customer experience at airports may be helping too, after last summer’s baggage chaos, and even Christmas strikes by the UK’s border control staff do not seem to have dampened travellers’ ardour to get out of (or visit) Britain for a break.

In the first quarter, seats flown grew by 30% and passenger volumes by 47% as capacity grew and load factors improved. Throw in a 36% increase in revenue per passenger seat and how that outstripped cost growth per seat of 18% and it is easy to see how easyJet reduced its first quarter loss so sharply.

Source: Company accounts. Financial year to September

However, easyJet clearly must do more than simply ride the recovery higher, assuming a recession does not snuff it out.

The pandemic presented easyJet with a terrible challenge and the firm has done well to come out of the viral outbreak and lockdowns in the condition it is in, especially after three years of trading losses. But the share price had been losing altitude for some time before then and it peaked in 2015 (when profits did the same, perhaps not coincidentally).

Over the past decade, easyJet’s shares have lost more than a third of their value, while the S&P Global 1200 Airlines index has advanced by 80%.

Source: Refinitiv data

Greater competition between low-cost airlines is perhaps one reason for this, as Ryanair, Wizz Air, Vueling and others take on easyJet. Even the failures of Monarch, Primera Air, Air Berlin, Alitalia and Flybe have done little to alleviate the pressure, perhaps in part because Flybe was sold on for next to nothing, including its debts, and revived, while Alitalia and other strugglers received state bailouts to keep them going.

The ongoing struggle with major shareholder Sir Stelios Haji-Iannou may not have helped in this respect either, although peace now seems to have broken out here after the airline’s founder seemed to accept easyJet’s plans for growing its Airbus fleet after several years of arguing that cash returns to shareholders were a better idea than capacity growth.

EasyJet signed a multi-billion-dollar order with Airbus last summer for more than 50 new, more fuel-efficient aircraft. How the delivery schedules develop will be an interesting guide to management’s confidence in the future, especially as Mr Lundgren expects capacity to get back to pre-pandemic levels by the July-September quarter of this year.

EasyJet’s fleet totalled 320 aircraft as of September 2022 and seven deliveries are planned for 2023, followed by 21 in 2024 and 23 in 2025. As Airbus A320s and A321s replace less efficient A319s, the fleet could grow to 346 by 2025 based on current contractual maximums for new deliveries (although it could hit 308 based on contractual minimums).

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