In an aviation industry that has been struggling for some time, easyJet (LSE: EZJ) looked different. Airlines like Flybmi and Wow Air failed, and the future for others in the industry was uncertain. In 2019, the easyJet share price rose roughly 24%.
And then the coronavirus crisis happened. People around the world were warned against non-essential travel, with some countries even closing borders.
Following this news, as you would expect, aviation stock prices were some of the hardest hit. International Consolidated Airlines‘ share price has slumped by roughly 65% in the year-to-date. By comparison, the FTSE 100 has fallen by 25% during the same period.
As demand plummets, some airlines have taken to suspending flights.
Contrarian investors may be thinking this is the time to buy big when it comes to airline stocks. They may sense that as people are fearful of buying these shares, now is the time to be greedy.
Let’s take a look at one airline that could represent a great buying opportunity.
The case for buying easyJet shares
As you can imagine, running an airline swallows a huge amount of capital. If the demand is not there, then the only realistic option is to ground the planes. Without cash flow, and with a large amount of expenditure, it does not make sense for some airlines to continue flying.
This is the action that easyJet chose to take at the start of the week, by grounding its entire fleet of planes. easyJet announced that it had collaboratively come to an agreement with Unite, the union, on furlough arrangements for its cabin crew, effective from 1 April. This will be for a period of two months, and the group has announced that 80% of the crew’s average pay will be paid through the Government’s job retention scheme. No debt refinancing is due until 2022.
Most investors, I imagine, will understand that easyJet had to take these steps in order to relieve the group from two significant costs at an unprecedented time.
It might be worth noting where easyJet was a few months ago, before the true extent of the coronavirus crisis was realised. In its Q1 trading update — which was released in January — easyJet announced that passenger numbers and revenue had increased on Q1 2019, and there was “robust demand across Europe” and “low competitor capacity growth in the market”. It also praised the success of the easyJet Holidays launch in November 2019.
With nobody quite sure when its planes will be flying again, these results might seem of little consequence and certainly will not be reflected in the easyJet share price. However, it is important to remember that you are buying part of an otherwise-strong company.
Bailing out?
Airlines are difficult businesses for investors. Much can happen outside of their control, like a change in oil prices, ash-clouds and now the coronavirus.
There has been lots of coverage about a possible bailout for airlines. If I was looking to invest in the industry, I would certainly not be banking on this. Once again, it is outside of the businesses’ control and the possibility of it happening is uncertain.
Is the easyJet share price now trading at a bargain-buy level? Possibly. But for now, I will be putting my money elsewhere.
