easyJet’s (LON:EZJ) share price recently sunk to a ten-year low of around 345p. This is below the 396p level recorded in the months following the start of the pandemic in 2020 and provides clear evidence that investors are extremely downbeat about the budget airline’s near-term prospects.
Indeed, just as the easing of Covid-related travel restrictions has gathered pace, the firm has faced challenges such as operational difficulties and weak consumer sentiment that recently slumped to its lowest level since records began in 1974.
As a result, a share price fall of 39% year-to-date and a 21% underperformance of the FTSE 250 over the same period is perhaps unsurprising.
The company’s latest trading update for the three months to 30th June was relatively sound. Although the business recorded a headline loss before tax of GBP114m, operational disruption from staff shortages and other issues caused a GBP133m exceptional cost.
Despite the operational challenges it faced during the quarter, the airline carried seven times more passengers than in the same quarter of the previous year. This represents 87% of pre-Covid capacity. The business expects capacity in the final quarter of its financial year to be 90% of pre-pandemic levels.
The firm’s ancillary yield per passenger increased by 55% vis-à-vis pre-Covid levels during the quarter. And with the firm’s holiday business booking a GBP16m profit, it has the potential to act as an additional catalyst on its future financial performance as industry conditions eventually normalise.
Clearly, it is impossible to determine when the firm’s trading environment will improve. It seems likely that the operational difficulties it has experienced of late will dissipate over the coming months as the firm ramps up its capacity. However, as is relevant for all companies that rely on discretionary consumer spend, judging how deep and long lasting the cost-of-living crisis will be is almost impossible.
easyJet, though, is in a relatively strong financial position to cope with further external difficulties. For example, as at 31st March it had a net debt position of just GBP0.6bn. Its cash position was GBP3.5bn, with access to up to GBP4.4bn of liquidity. Therefore, it is capable of surviving short-term difficulties to benefit from a long-term economic recovery.
It could also be argued that budget airlines are relatively resilient. Increasingly price-conscious consumers may trade down to cheaper options in response to the impact of high inflation and rising interest rates on their personal finances.
easyJet’s 24% share price decline since this column highlighted its long-term investment potential in June means that it now offers a wider margin of safety. Indeed, it trades on a forward price-to-earnings ratio of 10 using 2023 forecast earnings. This drops to just 7 when 2024 expected earnings are factored in.
Therefore, the company continues to have long-term investment potential. Certainly, its recent share price performance has continued to be hugely disappointing. But with a solid financial position, increasing capacity and a low valuation, it has significant recovery potential as its operating environment improves over the coming years.
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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.
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