easyJet PLC's (LSE:EZJ) decision to stimulate passenger demand through lower fares rather than cut capacity to restore pricing power is sacrificing profitability to defend market share, UBS argues, slashing its 2026 profit before tax forecast by 53% and cutting its price target to 635p from 700p.
The bank retains its 'buy' rating on the low-cost carrier but flags three negative surprises from last week's trading update: third-quarter 2026 pricing is running below the prior year when it needs to be rising to offset fuel pressure; an unforeseen £30 million legal provision has emerged; and capacity guidance remains unchanged when UBS believes cuts are warranted.
Analyst Jarrod Castle now forecasts easyJet's flight-only business will break even in 2026, with all group profitability coming from the easyJet Holidays division, which saw 22% volume growth in the first half.
The broker's revised 2026 profit before tax estimate falls to £232 million from £495 million previously, with the EBIT margin collapsing to 2.3% from 7% the prior year.
The core problem is the interplay between rising fuel costs and insufficient yield growth to offset them, with fuel prices rising £25 million in March alone and third-quarter yields running negative against a backdrop of maintained seat capacity.
Fourth-quarter pricing commentary was described as only slightly positive, which UBS views as insufficient to recover third-quarter weakness or protect margins against the fuel headwind.
For 2027, UBS reduces its capacity growth assumption from 5% to 4% and cuts earnings per share by approximately 13%.
Despite the downgrades, UBS argues the shares, now trading below their September 2021 rights issue price of 394p, are unjustifiably cheap for a net cash company with a strong holidays business on track to hit a £450 million profit before tax target by 2030.
The next significant catalyst is the full first-half results release on 21 May, when summer trading will also be updated.