EasyJet’s biggest worry had been just how quickly air fares would recover; now the concern is how much cash the budget airline will have to hand back to compensate its stranded passengers. It is all a further illustration of just how the chaos at airports has disrupted the recovery for carriers struggling to return to profitability.
Airline stocks are cheap and easyJet is the most lowly priced of all. The carrier has an enterprise value of only 3.89 times forecast adjusted earnings before tax and other charges, below those of Ryanair, Wizz Air and even International Consolidated Airlines Group, the long-haul specialist behind British Airways and Iberia. EasyJet has underperformed both Wizz and Ryanair since the pandemic grounded flights in 2020, delivering a negative return of almost 60 per cent, compared with a 34 per cent negative return from Wizz and gains of just over 6 per cent from Ryanair.
A £1.2 billion rights issue last September — the second equity-raising in less than 18 months — tells only part of the story for the shares’ dismal performance. The market has also factored in far less ambitious fleet expansion plans by easyJet than those of Wizz and Ryanair, with the number of aircraft barely expanding until at least 2026.
EasyJet is trying to win market share by taking business from legacy carriers at airports — such as Gatwick in London or Charles de Gaulle in Paris — that it already uses by trying to compete on price. Flying to and from more desirable locations in western Europe brings with it higher operating costs than the eastern European bases where Wizz has a foothold. That’s one headache in a period of rapidly rising inflation in trying to improve profit margins.
The other potential problem — at a time when airports are short of staff and flight cancellations are angering passengers — is that it could cause easyJet to follow British Airways’ lead and thin its flight schedule. BA said this week that it was cutting 10,000 short-haul flights to and from Heathrow between late October and March.
EasyJet reckons it has the staff it needs for this year, after hiring 1,700 people for the summer rush. That will be clearer once the holiday season ends. The cost of compensating disgruntled passengers after cancelling thousands of flights has burnt a hole in easyJet’s bottom line. Over the three weeks to the end of June, costs associated with disruption were £133 million, which sent the group to a £114 million loss. And that was before the summer holiday boom began. More costs seem likely to follow when the airline unveils fourth-quarter figures later in the year.
The burden of more costs takes the shine off a recovery in capacity, which stood at 87 per cent of 2019 levels during easyJet’s third quarter. It does not expect to recover to pre-pandemic capacity until next summer. That will help margins, which are severely blunted by flying aircraft with empty seats, but the timeline for achieving amargin in the mid-teens is far more uncertain, given the impact of energy costs and wage inflation. EasyJet has hedged 83 per cent of its fuel exposure for the three months to end of September, is 60 per cent-hedged for the first half of the next financial year and 33 per cent for the half to the end of September next year.
If easyJet has one thing in its corner, it is a low degree of leverage. The scale of last year’s rights issue means net debt stood at about £200 million at the end of June and it retains an investment grade credit rating. That could be a handy negotiating tool in an era of rising finance costs. But easyJet’s cheapness doesn’t make it a bargain.
ADVICE Avoid
WHY Travel disruption and cost inflation could cause the airline to disappoint market expectations
Lookers
Higher sales prices have kept the top line rolling for Lookers. That’s just as well, because the shortage in semiconductor chips that has restricted new car supply shows no sign of easing, according to Mark Raban, the motor retailer’s chief executive.
Demand far outstrips supply for new cars, which means dealerships are forced to offer fewer discounts than normal. A shortage of new cars also means used vehicles are more expensive. The result? Revenue over the first six months of the year was ahead of the comparative period last year and pre-tax profits held firm, beating market expectations — that despite a 14 per cent decline in total unit sales and the absence of pandemic support received last year.
The uncertainty surrounding supply shortages prevented analysts at Peel Hunt, the house broker, from upgrading Lookers’ earnings forecasts. There is the question, too, of how long price increases for new and used cars will continue to outweigh the decline in sales volumes. The rate of growth in new car orders has started to slow, up by 2,000 since April, but at 22,000 it remains far above historic norms. Meanwhile, criminal and regulatory inquiries into Lookers over alleged fraud and mis-selling have been closed without further action taken. That removes one shadow looming over the stock, but the risks associated with cost inflation have created another.
Franchise motor retail is a low-margin business, but higher wage and energy costs increased operating expenses by almost 9 per cent during the first half. An operating margin of just over 2.7 per cent could be driven lower during the second half as the September licence plate release is typically a weaker sales catalyst than the March release. The group’s £78.5 million net cash and property holdings equate to 95p a share, 14p above Lookers’ present share price. Some of that cash will be invested back into the business, including digitising operations and developing new partnerships with original equipment manufacturers.
Pendragon, a rival, has received two takeover approaches in less than a year; cheaply priced shares suggest that Lookers could be next.
ADVICE Buy
WHY The company could be a potential takeover target
