The airline industry has been one of the worst-performing sectors over the last year. The pandemic grounded most flights, bringing the majority of airline stocks to their knees. But the UK government has made an announcement that might put planes back in the skies. And so the easyJet (LSE:EZJ) share price has soared by nearly 30% since the start of 2021.
What was this announcement? And should I be adding easyJet shares to my growth portfolio? Let’s take a look.
Why is the easyJet share price on the rise?
Last month, Boris Johnson announced a four-stage plan to ease the lockdown restrictions in the UK. Under the outlined roadmap to normality, international holiday travel from the UK is expected to return as of May 17 – just in time for the summer holiday season.
Since the announcement was made, easyJet reported that flights, as well as package holiday bookings, have skyrocketed by 337% and 630%, respectively. Needless to say, it looks like there is quite a lot of pent-up demand to go on holiday after being confined for a year.
This is undoubtedly fantastic news for the airline stock. But even though the easyJet share price has gone up, it’s still 30% lower than its pre-pandemic levels. This suggests there is plenty more room for recovery growth. But, as always, there are some risks to consider.
The pandemic caused some damage
2020 was a devastating year for easyJet and its share price. Since the company’s fleet was grounded, it has had virtually no source of revenue flowing into the business. But operating costs didn’t disappear. After all, while fuel expenses could be avoided, there are still airport fees, staff salaries, and maintenance costs to worry about.
As a result, the business has reported its first loss in 25 years and has had to raise an additional €1.2bn of capital through seven-year bonds to remain afloat. Naturally, this has impacted its financial health and will likely extend its Covid-recovery time.
Another risk to consider is the easing of lockdown restrictions themselves. Suppose Covid-19 infection rates begin to rise as easing occurs. In that case, travel restrictions will likely remain in place for a while longer. Depending on the delay, the firm may need to raise even more capital, with the easyJet share price declining as a consequence.
The bottom line
Yet despite the increase in leverage, easyJet still looks healthy as a business to me, especially as half of its fleet is still eligible for aircraft lease-back agreements.
These contracts allow easyJet to sell one of its planes to a third-party that immediately leases it back to easyJet. This enables the stock to raise large lump sums of cash quickly without affecting its leverage or suffering any disruptions to business operations.
Therefore even though there are risks, the potentially massive boost in air travel on the horizon makes easyJet a stock I would consider adding to my growth portfolio.
