easyJet (LSE: EZJ) revolutionised the market for low-cost air travel throughout Europe, and since its IPO in May 2000, the company has produced fantastic returns for its shareholders.
From its IPO price of around 350p, the shares reached a peak of 1,915p in May 2015, a return of 447% excluding dividends compared to a gain of less than 15% for the FTSE 100 over the same period.
Nosedive
Unfortunately, this turned out to be a high point for the stock. easyJet encountered turbulence towards the end of 2015 and has failed to recover since. Brexit has been a factor, but it would be a mistake to blame politics for all of the company’s troubles. Overcapacity, rising costs, air traffic controller strikes and even drones have all had an impact on profits.
For example, during the first half of the company’s current financial year, headline cost per seat increased 3.9% and total revenue per seat felt 7.4% at constant currency. The drone attack on Gatwick, which caused flights to be suspended for 36 hours, also cost the firm £10m in total, although this was a relatively insignificant cost compared to its overall loss of £272m for the period.
It’s usual for airlines and travel companies to make a loss over the slower winter period, as increased activity over summer usually makes up the difference. However, easyJet’s loss was bigger than expected. For the same period last year, it lost £68m on a pre-tax basis.
Following this dismal performance, it’s no surprise shares in the airline group have declined 44% over the past 12 months, underperforming the FTSE 100 by around 38% excluding dividends. Such a decline is bound to attract value-seeking investors, but is it really worth trying to catch this falling knife?
Too much uncertainty
It’s difficult to provide an answer to that question because there are just so many moving parts here.
easyJet’s earnings are under attack from all angles. Other companies keep adding capacity and lowering prices, which the company has no control over. Then there are fuel prices to consider and currency movements.
On top of this, we have unforeseen events such as the Gatwick drone debacle and air traffic controller strikes across Europe. In this month alone, there have already been strikes by airport personnel in Italy, Belgium and France disrupting thousands of clients and more than 100,000 passengers. These strikes are immensely costly to carriers like easyJet, and they have virtually no control over them.
With so many variables to consider, it’s almost impossible to say whether or not the easyJet share price offers value at current levels. The stock is currently dealing at a forward P/E of just 10.4, based on current City estimates, which looks cheap. But another series of strikes across Europe or drone interruption at Gatwick could blow this forecast out of the water.
So overall, while shares in easyJet might look cheap after falling more than 40% over the past 12 months, I’m not a buyer at current levels. That’s because we just don’t know what will happen in the airline industry going forward.
