easyJet’s (LSE: EZJ) share price appears to be in recovery following a steady decline since May of this year and a shock dip in early September.
However, I believe easyJet shares remain a poor investment for the long term because, unless it makes some radical changes to its business model or we witness an incredible technological leap in the next half decade, it will struggle to find footing in a decarbonising world.
A fragile business model
The first issue is the nature of budget airlines. easyJet and others like it operate within a particularly delicate niche in the market, offering cheap flights to local holiday destinations for commercial passengers. The key word there is cheap. By necessity, easyJet operates on very tight profit margins, only taking home £466 million in 2019 from a total revenue of £6.3 Billion. Often the sale of tickets doesn’t cover the cost of flying the plane, even on a fully booked journey, forcing easyJet to lean heavily on ancillary products and services to make up a full 21.5% of its revenue.
This model also relies on two very fickle economic factors: cheap fuel and high demand. If anything comes along to upset this delicate balance then the entire sector can some crashing down, which is what we saw during the pandemic. While demand appears to be returning, I believe that the days of cheap fuel will soon be behind us.
Climate change has been the elephant in the room for almost 40 years. The fact that world leaders are finally willing to admit its presence is a huge relief to my generation, but with it comes climate policy and carbon taxes.
If the whole aviation industry has to raise its prices to account for these new taxes, I don’t see what room this leaves for mid-range budget airlines like easyJet.
I think that the market has been aware of this coming change for some time too, as we are far away from the halcyon days of 2018 when easyJet’s share price reached its all-time high of 1,507p.
I like cheap holidays as much as anyone, but the reality is that every country around the world MUST decarbonize its economy. When the main draw of easyJet and companies like it is their low cost, I don’t see how they can survive in the new market reality.
Technology might make the difference
It’s not all doom and gloom of course, so long as easyJet is able to adapt.
A few small start-ups in the U.S and Canada have been pioneering electric plane technology for short-haul flights, and hydrogen fuel cells look increasingly viable as an alternative to burning fossil fuels.
If easyJet is able to survive long enough for technology to catch up to where it needs to be, then it may well thrive in a post green transition economy.
But for me, it’s too much of a risk to take, and is why I won’t be adding any easyJet shares to my portfolio any time soon.
James Reynolds has no position in any of the shares 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.