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Here’s why I will continue to avoid easyJet shares

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An easyJet plane takes off
Image source: London Luton Airport

I believe easyJet (LSE:EZJ) is one of a number of airlines continuing to suffer a hangover from the pandemic. I wrote earlier this year that I would avoid easyJet shares for my portfolio. Reviewing more recent events, my stance has not changed. 

easyJet share price woes

As I write, easyJet shares are trading for 687p per share. Twelve months ago, shares were trading for 489p per share which means the shares have increased by 40% in that period. In February 2020, prior to the market crash and pandemic, shares were trading as high as 1,508p per share. Levels have not returned anywhere near pre-pandemic prices but have staged a mini-resurgence in the past 12 months.

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A contributing factor towards the easyJet share price rise is the Covid-19 vaccine roll out leading to the easing of restrictions. Furthermore, reopening and pent-up demand could help investor sentiment in the future too.

Despite that, travelling and holidays have become more complex with testing requirements as well as many countries adopting their own systems to identify risk levels associated with destinations. An example of this is the UK’s traffic light system.

Now that reopening is in full effect and holidays are being booked once more, is there a chance easyJet shares could be an attractive prospect once more? I for one have finally booked a holiday (albeit for next year) so there is a chance easyJet could be boosted. However, there are too many factors putting me off investing just now. 

3 reasons why I’m avoiding easyJet shares

  1. Competition. Since easyJet’s inception in the mid-1990s, it has played a pivotal part in revolutionising budget travel. In recent years, it has begun to lose market share to upstarts popping up and offering cheaper and arguably better alternatives. It’s closest competitor is Ryanair. I found Ryanair were charging less per flight on average therefore capturing higher customer numbers than easyJet too. This was pre-pandemic, however. 
  2. Financials. The pandemic saw many airlines, including easyJet, having to cut costs and raise funds, such as a recent rights issue, to keep the lights on. EasyJet did have plans before the pandemic hit to invest in its fleet. These growth plans may not play out as intended now. Instead, it will face a battle to grow once more due to financial constraints, in turn dampening easyJet shares’ investment viability.
  3. Business model. EasyJet is a budget airline, which means it operates on tight margins. The revenue from ticket sales often do not cover costs of the flight. There is a heavy reliance on additional purchases and products they offer. Although I understand its competitors face the same issues, I feel they are better equipped financially and from a market share perspective compared to easyJet.

My verdict

I believe easyJet shares could be on my no fly list for the foreseeable future. As well as the points noted above, there is the small matter of climate change to contend with. This will also cost airlines millions in carbon taxes. Furthermore, cheap fuel was easy to access in the past. The rising price of oil and fuel will negatively affect my view on easyJet shares. I’d rather look at other stocks for my portfolio and will avoid easyJet.

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Jabran Khan 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.

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