While the easyJet (LSE: EZJ) share price is up 57% on where it was a year ago, it has not been an easy few months for shareholders as the shares have been sliding down. But that’s the past. The questions now are: what does the future hold, and are pandemic-related issues facing airlines like easyJet an opportunity or a trap?
Dilution and business travel
easyJet is still having to raise funds from shareholders. The airline plans to raise £1.2bn through a rights issue. Participants will be able to buy 31 shares for every 47 they own, at a 35.8% discount to the expected market price following the issue.
So there will be dilution, which would make future earnings per share growth even harder to come by because it will be divided between more shares.
It also highlights just how much pressure airlines remain under even as lockdowns generally are lifting – although of course that’s not true everywhere.
There’s also the issue of business travel. How long will it take for that to recover post pandemic now that companies are equipped to use videoconferencing and can save money on travel? This may affect easyJet less than other airlines, but it’s still a problem management will have to grapple with.
Light at the end of the tunnel for the share price?
While the easyJet share price certainly faces a lot of headwinds, perhaps better times are just around the corner. Many people have built up savings over lockdown, much of which could, as restrictions ease, be spent on foreign holidays.
The government is changing the traffic light system and rules around PCR testing – developments that could help airlines.
easyJet could use the rights issue to become significantly better placed to grow when conditions become more favourable. For example, it could acquire more airport slots. It could also reduce debt or buy back shares, which in turn could help the share price.
Another possible positive is that easyJet has appointed Stephen Hester as a director, and chair-designate. He comes with experience of turnarounds and is a successful and experienced executive. It’s possible his expertise could really help the airline over the coming months and years.
It’s been a difficult 18 months or so. Few industries have been hit as hard as travel. But there’s potential for a turnaround and easyJet is still standing, with a lot of help from its shareholders.
All that said, in a world of recovery plays, is easyJet really a standout buy? Not for me. It strikes me as more of a value trap than an opportunity for significant returns. That’s why I see little reason to add it to my own portfolio. I may be wrong and it may be the one that gets away spectacularly – nobody knows at the moment.
Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.