With the revelation this month of bid interest in budget airline easyJet (LSE: EZJ), investor interest in the shares has heightened. After the bidding war for Morrisons, some hope that a similar frenzy could see potential buyers driving up the price of easyJet shares.
But are they good value, or would I be better off considering rival Ryanair (LSE: RYA) for my portfolio? Here I consider the case for each.
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easyJet: weakened demand and cash burn
The bid approach and a planned fundraising both point to one of the key challenges facing easyJet and many other airlines at the moment: liquidity. Operating an airline is a costly business even if planes sit idle on the ground. So the dramatic drop in demand over the past 18 months has damaged easyJet’s financial strength.
The airline’s response has been to cut costs. But it is still struggling with weak customer demand. Its most recent trading update, covering April to June, reported nearly 3m passengers. But one in three seats flew empty. That was despite capacity being 83% lower than the pre-pandemic 2019 equivalent figures. Cash burn was reduced, but still came to £55m for the three months. While the company hopes the current quarter will be better, it is still expecting 40% less capacity than in 2019. That helps saves costs, but shows that passenger demand is far from close to a full recovery.
The easyJet share price
The airline went into the pandemic in a strong financial position. Owning many of its own planes has helped it shore up liquidity. But 18 months on, easyJet continues to struggle. Its rights issue this month can be taken as a sign of strength: it helped boost funds and signalled investor confidence.
But the rights issue also underlined the challenges facing the company. Demand has been slow to return, and cash burn continues. If a wave of consolidation sweeps the European aviation industry, easyJet looks more like a target than a bidder, as Wizz’s predatory interest showed. I don’t think the 61% increase in the easyJet share price over the past year properly reflects the challenges facing the company. I am not buying easyJet shares for my portfolio.
An alternative to easyJet shares: Ryanair
With a market capitalisation well over three times that of easyJet’s, rival Ryanair is an possible alternative candidate for my portfolio. I think its passenger experience is horrible – something it has been working to improve – but that does not detract from its proven acumen in running an airline.
The company carried over 11m passengers last month, filling 82% of available seats. That alone suggests its route planning and capacity management may have been better than easyJet’s. While easyJet has given the sense of spending the pandemic in crisis response mode, Ryanair has used the opportunity to strike bargaining positions for new planes that could help it expand in future.
Ryanair versus easyJet shares
But while I prefer Ryanair to easyJet shares, I still see risks. Demand recovery is uncertain, which could hurt profits.
Using pre-pandemic earnings, Ryanair’s price-to-earnings ratio of 29 looks steep to me. EasyJet’s shares trade on a lower ratio, but I’m not sure they’re better value given its ongoing challenges. Then again, while I prefer Ryanair’s focussed management and strategy over easyJet’s, I also wouldn’t buy Ryanair for my portfolio at the current price.