City analysts have reacted positively to the latest results from FTSE 100-airline operator EasyJet PLC (LON:EZJ), but some have remained sceptical on the long-term outlook for the group.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Lower competitor capacity and continuing investment in new routes has sent revenues soaring in the first half. It’s a welcome change from recent years when brutal competition forced the industry to cut prices, eventually driving several smaller players out of the market. easyJet has taken advantage of its rivals’ misfortune to pick up some attractive routes and continues to grow its fleet. If price pressure continues to ease, that should be good news for the top line.
However, he was cautious on the outlook for the group, given “stubbornly high” non-fuel costs, adding that it was currently being “masked by revenue growth”.
He added: “While more lower margin passengers might boost profitability in the short run, it won’t make for a robust business if times turn tough. Whether planes are full and flying, or empty and grounded, leases and loans must be repaid, and lower margins mean even a small downturn in customer numbers could seriously dent profits."
Higher oil prices, which are currently hovering around US$79 a barrel, are also likely to become a headache for the airline going forward, as fuel costs creep upwards.
Elsewhere, Russ Mould, investment director at AJ Bell, chimed more positively on the results: “A bumper first half set of results and various new initiatives like a loyalty scheme and investment to properly develop a holiday business would suggest a new lease of life for low-cost airline easyJet. Passenger numbers have gone up, it is making money from each person flying and costs are only increasing by a small amount. Furthermore, forward bookings are ahead of last year.
He added: “Admittedly some of the recent performance was helped by reduced capacity from other airlines, but EasyJet is clearly doing something right to be pushing up the important performance metrics. It’s the simplest things that sometimes work and a loyalty scheme certainly could be easy to roll out and help improve customer stickiness. EasyJet has the advantage of a well-known brand and, given that travellers already have strong trust in the business for the flying side, getting them to add accommodation in the same transaction could be an easy win for the group as long as the price is right.”
Prospects likely to be reviewed after competitors' report
Analysts at Liberum commented that despite concerns around Ryanair’s recognition of unions for its pilots and flight crews, “its margins and returns on capital remain significantly superior, with free cash flow generation supporting share buybacks. In contrast, easyJet is facing a ramp up in capex and a squeeze on free cash generation.”
They added: “Management’s guidance implies a material uplift to consensus earnings, but in our view this is already at least partially priced in. We believe the market is focussing excessively on short-term earnings momentum rather than fundamentals, and that easyJet's challenges are not reflected in its rating.”
Non-budget competitor and British Airways owner International Airlines Group PLC (LON:IAG) will also be eyed after its first quarter results for 2018 saw operating profit before exceptional items rise 75% to €280mln compared to the same period last year.