easyJet PLC (LON:EZJ) said it had a strong start to the new financial year with revenue growth and the completion of its acquisition of Air Berlin’s operations at the capital’s Tegel Airport.
The budget airline has become the leading short haul carrier at Tegel after taking over runway slots and aircraft from collapsed Air Berlin on December 15 in a deal worth €40mln.
READ: easyJet to benefit from collapse of short-haul rivals, says Morgan Stanley
In a trading update for the three months to December 31, easyJet said it had successfully started operations at Tegel on January 5.
"We expect to reach a series of milestones in 2018 including the roll out of our full summer schedule at our newly established base at Berlin Tegel, an increase in passenger numbers from 80 million to around 90 million, 'Worldwide by easyJet' will be expanded to around half of easyJet's network allowing customers to connect to long-haul services, our fleet will increase to over 300 aircraft by spring 2018 and we will take delivery of our first A321neo aircraft," said chief executive Johan Lundgren.
Revenue in the first quarter rose 14.4% to £1.14bn compared to the same period a year ago. Passenger numbers increased 8% to 18.8mln and revenue per seat grew 6.6% at constant currency to £55.03, or 8.4% to £55.99 on a reported basis.
The load factor, a measure of the number of seats available against the number of passengers, rose by 2.1 percentage points to 92.1%. Capacity grew by 5.5% to 20.4mln seats.
"Most pleasingly of all, revenue per seat on a constant currency basis was up 6.6%, slightly better than anticipated by management in November when it suggested this would rise ‘by low to mid-single digits’," said Neil Wilson, senior market analyst at ETX Capital.
READ: easyJet carries more passengers over Christmas despite more cancellations
On the increase in the load factor, Wilson said "we can pin this on slowing capacity growth due to the combination of Ryanair cancellations and the failure of Monarch, Air Berlin and Alitalia".
While he expects the consolidation of short-haul airlines to support easyJet's load factor over the winter, he said easyJet is not immune to the risks facing the industry.
"The problems of overcapacity in European short haul combined with pricing pressures (albeit less of a threat than they were a year ago) means it will remain tough going for carriers. EasyJet needs to maintain focus on cost control, which it is achieving at present," he said.
easyJet delivers cost savings
An increase in the load factor resulted in higher costs but this was offset by savings of £28mln as part of the so-called ‘lean programme’.
The savings also mitigated the costs of disruption caused by adverse weather and industrial action as well as higher wages for crew and pilots.
Headline cost per seat improved by 1.6% thanks to low fuel prices and cost control. Excluding fuel prices and foreign exchange fluctuations, cost per seat increased by 1%, reflecting underlying inflation and the impact of disruption.
Headline cost per seat, excluding fuel at constant currency, is expected to increase by about 1% for the full year.
easyJet expects fuel costs to decrease in the first half and that exchange rate movements will have a £5mln positive impact on full year earnings.
Further revenue growth expected
Revenue per seat in the second quarter is expected to increase by “mid to high single digits” as the company has secured about 60% of anticipated bookings for the second quarter, excluding Air Berlin operations.
The group plans to grow its seat capacity, excluding Tegel, by around 5% in the first half and by between 5% and 6% for the full year.
easyJet ended the first quarter with net cash of £357mln and said it is “well positioned to take advantage of the opportunities that are available in the current market”.
“With its strong balance sheet and significant financial and operational flexibility, easyJet is confident in its ability to drive long-term shareholder returns from its strategy of purposeful investment in securing leading positions in its core markets,” the company said.
RBC upgrades easyJet
RBC Capital upgraded its rating on easyJet to 'outperform' from 'sector perform' and lifted its target price to 1,700p from 1,450p. The broker said it expects easyJet to benefit from new rail links opening in London that connect to airports where the airline is based.
"2018-2019 sees a growing chance major London rail infrastructure changes (Crossrail/Thameslink) will come to fruition (that we find investors have not yet considered)," it said.
"The now increasingly probable delivery on new Crossrail and Thameslink service expansion looks set to open up new catchment markets to easyJet at Gatwick and Luton – to the likely detriment of Heathrow’s legacy operators."
RBC also believes low cost carriers are "fundamentally undervalued". It expects a 6-8% upgrade to consensus forecasts for easyJet's pre-tax profit in fiscal years 2017 and 2018 to £470mln to £480mln, respectively.