EasyJet PLC(LON:EZY) will benefit from the recent bankruptcies of rivals Air Berlin and Monarch, according to analysts at Societe Generale and Kepler.
Societe Generale (SocGen) and Kepler both upgraded the stock, citing lower competition for EasyJet at its main UK airports following the recent sector consolidation.
READ: EasyJet shares surge as full year profits fall but revenue outlook upbeat
EasyJet has agreed to buy some of Air Berlin’s assets at Berlin Tegel Airport, including landing slots and leases for up to 25 A320 aircraft, for €40mln.
SocGen raised its rating to 'hold' from 'sell' and raised its target price to 1,400p from 1,050p, saying: “While this deal will burden profits in fiscal year 2018 (EasyJet expects a total £160m loss) and distort numbers in the short term, it could turn out to be highly beneficial from 2019 onwards: air passenger numbers in Berlin are structurally growing, the airport system will be slot constrained for many years to come, and the UK business share comes down further."
Air Berlin filed for insolvency in August after its main shareholder Etihad declared it would not be providing further financial support.
Outlook improving after exit of Monarch and Air Berlin
Monarch collapsed in October, leading to 1,858 workers being made redundant and the flights and holidays of about 860,000 customers being cancelled.
EasyJet had expressed interest in buying Monarch’s take-off and landing slots at London's Gatwick airport but British Airways owner International Consolidated Airlines Group PLC (LON:IAG) has trumped competitors with its bid.
Kepler, which lifted its rating to 'buy' from 'hold' and increase its target price to 1,551p from 1,300p, said even if competitors took over Monarch’s slots would be unlikely they could fully replicate EasyJet’s network.
“Berlin Tegel is set to become easyJet’s second-most important airport, with an estimated contribution of circa £40mln a year to pre-tax profit as of 2019, and allow the group to improve brand perception in Germany,” Kepler said.
“We see good chances that the company could get attractive slots at other relevant Air Berlin airports as well (e.g. in Zurich), which would allow it to improve its product in Switzerland.”
SocGen said with Monarch and Air Berlin having exited the market the outlook may be improving.
“Pricing has recovered in recent weeks, as reflected in EasyJet’s optimism for the first half,” it said.
Last week EasyJet said revenue per seat growth at constant currency in the first half is expected to be “positive by low to mid-single digits”.
Brexit uncertainty
But SocGen warned that even though the operating environment has normalised and recent competitor bankruptcies open new opportunities, the uncertainty around Brexit and the group’s weak cash flows remain obstacles.
“The operating environment for EasyJet has been normalising since the summer, after a deterioration in the security situation, starting in 2015, that badly hit EasyJet’s destinations in Northern Africa, Egypt and Turkey, and in 2016, a plunge in the oil price and ticket prices, and Britain’s vote to leave the EU which sent the pound to a seven-year low.
“However, the upcoming months will be decisive on how Brexit will take place. Will there be a hard exit (without a treaty and transition period), or will it take place in a controlled manner or not at all – currently nothing seems to be excluded.”
The outcome of Brexit negotiations will be “decisive” for EasyJet as about a third of its capacities go to and from the UK, SocGen said.
A hard Brexit, which would likely be followed by another slump in the pound and a macro-economic downturn, would be a “hard blow” for the whole sector and for EasyJet in particular as it has the highest UK outbound flight exposure, SocGen said.
Shares in EasyJet rose 0.83% to 1,396.50p in morning trading.