Curbing costs key to a smoother ride at easyJet
EASYJET’S full year results saw underlying profit before tax of £578million land at the top end of guidance. But there’s still plenty of space for the group to move up a gear.
The collapse of several rival airlines provided a handy boost – pushing extra customers onto easyJet seats. That helped passenger numbers and saw overall revenues climb an impressive 11 per cent to £6billion.
Extra bums on seats means more opportunity to sell bits and pieces like food and luggage fees. That’s significant because ancillary revenues are a high margin source of income, totalling £1billion this year.
There’s been some turbulence, though, largely thanks to things outside the group’s control. That includes a rising oil price, which has seen fuel costs take off.
This has increased the pressure to deliver savings from inside the business. Airlines are laden with high fixed costs compared to other businesses – renting planes and airport space doesn’t come cheap. When a downturn strikes they’re left holding those bills even if the planes are empty.
EasyJet’s been trying to tighten non-fuel costs for a while, but it hasn’t pulled this off yet. In fact costs per seat rose 4.8 per cent this year. With rivals flying more planes, competition is tough and that’s keeping prices low.
In turn that’s squeezing profit margins, so a helping hand from lower costs is needed.
EasyJet has promised to pay out 50 per cent of profits as dividends. Profits will rise and fall with the economic tide, so that could make for fairly unpredictable payments. It’s a sensible approach though, and a prospective yield of 5.3 per cent is above the market.
EasyJet’s medium term outlook could be a lot worse. Forward bookings for next year look strong – 50 per cent of seats for the first half have already been sold.
All in all, we’d like to see more efficient cost savings come to fruition before heaping too much praise. But if easyJet can get a handle on that and keep boarding record numbers of passengers, it could be in for a smoother ride.
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