EasyJet investors should pack a parachute
EASYJET is doing all it can to protect its business from pandemic-related turbulence, but some things are simply out of the discount airline’s control.
Covid has all-but erased air travel over the past year, and the high costs that come with operating an airline are chipping away at cash reserves.
It is flying less than 20 per cent of the planes it did in 2019, and cost cutting is the only lever left to pull. A restructuring plan helped slash its headline costs by 52 per cent during the first quarter.
Some of those cuts, such as improvements in fuel efficiency, will boost easyJet’s profits when things return to normal. Others, like staff reductions and route changes, could have a permanent and damaging impact on the business.
Management believes the leaner organisation will be able to spring into action when locked-down Europeans are finally freed to travel. That might seem true at present, but it’s starting to look as though airlines may lose another summer season to travel restrictions.
Getting planes back in the air quickly will become ever more difficult the longer aircrews are stuck on the tarmac.
EasyJet should benefit from the fact that it’s a low-cost, short-haul carrier – a segment that will likely recover ahead of the wider industry. But a prolonged post-Covid economic downturn could slow the speed of recovery as people postpone holidays abroad to save cash.
If there’s any bright side, it’s in easyJet’s balance sheet. With access to £2.5billion of funding, it shouldn’t be met with a near-term cash crunch. The airline has secured new loans and repaid and renegotiated some of its short-term debt.
That safety net came at a price though, including a government loan with restrictive terms that could limit future dividend payments.
EasyJet is in a stronger-than-average position compared to peers, but that’s a low bar to clear. The path to a full recovery looks rocky. Things are likely to get worse for easyJet and its peers before they get better, so investors still on board had better pack a parachute.
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