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Berenberg upgrades easyJet to ‘buy’ as it predicts pick-up in fares

Berenberg expects short haul carriers to limit capacity growth over the coming year, which should help to prop up ticket prices

easyjet plane
easyJet should also benefit from lower costs given fewer strikes so far this year

Analysts at Berenberg reckon easyJet PLC’s (LON:EZJ) 15% share price plunge so far this year has created a “compelling entry opportunity”.

The venerable German investment bank believes easyJet’s “historically low valuation” reflects fears among investors of ongoing demand weakness, which has had a knock-on effect on ticket prices.

READ: HSBC cuts easyJet to ‘hold’ in cautious sector review

But the analysts have crunched the numbers and expect oversupply in the short-haul European market to moderate into 2020.

“There are factors that could improve industry pricing, and margins, into 2020: narrow body aircraft delays and failures of smaller, distressed carriers will probably defer capacity growth, while more cautious management teams may further limit capacity,” said Berenberg in a note to clients.

easyJet itself has reduced its own capacity growth, and rivals such as International Consolidated Airlines Group PLC (LON:IAG) are expected to follow suit.

The law of supply and demand dictates that fewer options for travellers will increase demand for the remaining flights, which should lead to an increase in fares.

Fewer disruption costs

While higher ticket prices should support top- and bottom-line growth, easyJet’s profits also stand to benefit from lower costs.

“Fewer air traffic control and en-route delays this summer (year-on-year) will support unit costs,” said the analysts.

“Flight delay data and airline commentary suggest a better operating environment, which will prove particularly helpful for higher unit cost airlines such as easyJet.”

Given the more bullish outlook, Berenberg has upped its recommendation to ‘buy’ from ‘hold’, while it has also increased its price target to 1,120p from 1,040p.

easyJet shares were up 3.1% to 993p on Friday morning, making it one of the top risers on the FTSE 250.

Quick facts: easyJet plc

Price: 1508.5 GBX

LSE:EZJ
Market: LSE
Market Cap: £5.99 billion
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