Passenger numbers are rising, but the easyJet (LSE: EZJ) share price has fallen by 20% over the last month. What’s going on?
First, it’s worth remembering that easyJet shares are still worth 20% more than they were one year ago. The longer-term trend is positive. What I think we’re seeing at the moment is a reality check, as the difficulty of reopening hits home. Is this a buying opportunity? I think it could be.
3,381% more flights
Let’s start with the good news: easyJet is flying again. The company flew 24,682 flights during the three months to 30 June. That’s a whopping 3,381% more than during the same period last year, when the airline’s fleet was pretty much grounded.
I admit that this is still a long way below normal. Flights over the last three months were still only 17% of 2019 levels.
However, management expects flights over the next three months to rise to 60% of 2019 levels. That might not be enough for it to turn a profit this year, but in my view it’s a clear sign that things are getting closer to normal.
The secret to success?
To maximise flying levels over the last few months, easyJet has been shifting capacity around its network. In particular, it’s been transferring capacity from UK-EU routes to routes within the EU, where there are fewer travel restrictions.
I think this flexibility could help easyJet — and its share price — recover more quickly than flag carrier airlines such as British Airways.
This year is obviously going to be difficult for the budget airline, which is expected to report a loss of around £900m during the current year. However, easyJet has access to £2.9bn of cash if needed and is expected to generate a profit of about £240m next year. I don’t think the group is likely to need any further refinancing.
Although easyJet has cut costs and reduced its fleet of aircraft by 10% over the last year, management is already making plans to add capacity for next summer when foreign holidays are expected to rebound.
easyJet share price: why I’d buy
Investments always carry some risk, and that’s certainly true with easyJet (and other airlines). I can see two main risks for investors at the moment.
The first is a general industry risk that Covid-19 disruption will continue for longer than expected. We can’t be sure right now, but I think that if travel hasn’t normalised by next Easter, airline losses could be worse than expected.
For easyJet specifically, I think the risk is that historically, this airline has not been the cheapest (Ryanair and Wizz Air) or the most prestigious (British Airways and other flag carriers). easyJet has cut costs over the last year, but I still wonder if the airline will struggle to compete with more ruthless rivals.
However, at 800p, I think easyJet looks fairly priced for a long-term investment. Broker forecasts today put the stock on a 2022 price/earnings ratio of 15, falling to a P/E of 8 in 2023. I’d be happy to add the shares to my portfolio at this level.
