Is easyJet an easy bet?
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HOLIDAYMAKERS were plunged into chaos this week as airline Monarch announced it had gone into administration. The closure of the business, which could affect up to 850,000 travellers, came hot on the heels of the debacle at Ryanair, which has seen up to 50 flights a day cancelled and 34 routes scrapped.
Amid all the turmoil it is, perhaps, understandable that budget carrier easyJet has seen its share price climb almost 10 per cent to 1263p over the past month, on the basis it is well placed to cash in on its rivals’ woes. The orange- emblazoned airline has long had the reputation of being the friendlier counterpart to its Irish competitor and now, while Monarch looks for a buyer and Ryanair remains in thousands of travellers’ bad books, easyJet is the obvious budget alternative for holidaymakers.
Any rival leaving the market reduces the number of available seats, which could help put a floor under falling prices.
EasyJet obviously feels fairly confident about the future. Last month, it put in a bid to acquire part of Air Berlin’s short-haul business after that firm went into insolvency. It could buy up to 30 aircraft from the business if its bid is accepted. Analysts say it could boost profits by as much as 10 per cent.
Adding some of Monarch’s fleet to its numbers could provide a similar enhancement. But a deal with either airline would also mean taking on more debt at a time when operating costs are already rising – though the pound has recovered some strength in recent weeks, the oil price is up about 25 per cent since June alone. As well as that, new entrants into the budget flights market, such as Wizz Air and Nor- wegian, have increased capacity and therefore put downward pressure on prices. Many travellers are abandoning overseas holiday plans for myriad reasons, including a weaker pound and heightened terrorism fears. In its first-half figures, easyJet revealed losses had climbed from £21 million to £212 million, blaming weak sterling and the timing of Easter. But the airline had better news for investors in its third-quarter figures. In the three months to June 30, revenue was 16 per cent ahead of the same period a year ago at £1.4 billion, with revenue per seat rising 2.2 per cent to £57.78.
Latest figures show it carried 8.2 million customers in August – an increase of 9.4 per cent from a year ago. It estimates pre-tax profits for the year in the range of £380 million to £420 million.
Yet questi ons r emain as to whether easyJet is the right bet to make on how this particular story plays out. The turmoil passengers have endured in recent weeks could cast a shadow on the entire budget end of the airline sector.
Some have predicted that consumers could turn away from cheap flights in their droves in favour of quality carriers, which might be perceived as a safer pair of hands. If that happens, then it is firms such as BA-owner International Consolidated Airlines Group (IAG) that will benefit.
This theory doesn’t appear to have made it to the stock market yet, however. IAG’s shares are up a little over 1 per cent over the past month to 615p. Not that things aren’t going well; in its half-year results the group reported operating profits of £797 million for the six months to June 30, some 13.8 per cent more than previously. Revenue edged up 0.9 per cent to £9.7 billion and August passenger numbers were 0.7 per cent higher than a year ago at 10.6 million.
Midas verdict: The real question is whether or not consumers have had enough of budget airlines. If they shift towards quality carriers, it could spell a sell for the shares. But if price is passengers’ main priority – and people do like a bargain – then easyJet is the obvious beneficiary of this latest upheaval. Buy.