Clouds are finally starting to lift for Easyjet

MORE planes and flying with more passengers helped Easyjet increase revenues by 8.1 per cent, full year results revealed on Tuesday.

That should be good news but the airline is flying against twin headwinds of lower prices and rising operating costs.

Lower sterling, which increases the cost of overseas operations, isn’t helping either. To be fair, there’s little Easyjet can do about pricing pressure.

Capacity is pouring into the industry, and the resulting price war has already brought several weaker airlines to earth.

With margins under pressure, it has responded by putting more planes in the air, with capacity rising 8.5 per cent to 86.7 million seats last year. Extra scale and fuller planes should mean lower operating costs. But, lower fuel costs aside, that’s still not happening at the rate you might hope.

Easyjet’s ability to weather these conditions when others have struggled is largely down to the strength of its balance sheet. Even after accounting for aircraft leases, a major cost for airlines, net debt is still not much above half of the group’s annual cash generation. Rays of light are visible through the clouds, too.

The bankruptcies we’ve seen among smaller players – Monarch, Air Berlin and Alitalia, for example – have taken some capacity out of the market. Although many of these routes will be picked up by larger rivals, overall capacity growth is expected to slow.

Bookings for the year ahead are strong, and the popularity of the app and ancillary revenues are both growing nicely, too.

There are a few improvements we’d like to see before getting too enthusiastic about the stock, though. For example, costs per available seat kilometre are well ahead of rivals Wizz and Ryanair. That can be partly explained by its more-premium airports, but we can’t help noticing they’re increasing at a faster rate, too. CEO Carolyn McCall is off to join ITV at the end of the month, so it will be newcomer Johan Lundgren tasked with improving profitability. In the meantime, investors should receive a yield of 3.4 per cent next year but with dividends a function of earnings, there’s no guarantee of a smooth upwards trajectory.