These are challenging times for the easyJet (LSE: EZJ) share price. The low-cost airline plummeted in September after announcing a £1.2bn rights issue to boost its balance sheet after rebuffing a takeover attempt. It’s recovered ground since then but remains 19% lower in 2021.
Sure, easyJet’s share price has gained 33% in price on a 12-month basis. But last October it seemed like the walls were closing in on the FTSE 250 airline. The global travel industry was shut down and a breakthrough on a Covid-19 vaccine remained elusive. It’s no surprise then that the share price is higher today than it was a year ago.
However, easyjet isn’t out of danger just yet. Should I avoid the low-cost airline like the plague? Or should I use recent share price weakness as an opportunity to buy?
At last month’s rights issue, easyJet said that the fundraising would give it extra protection in case the coronavirus crisis drags on. But the orange-liveried airline didn’t adopt a solely defensive tone. It added that it has “the flexibility to take advantage of long-term strategic and investment opportunities expected to arise as the European aviation market emerges from [the] pandemic.”
The attempted takeover of easyJet (reportedly by Hungarian operator Wizz Air) illustrates how ripe the market is for consolidation right now. The low-cost travel sector is expected to lead the recovery in the broader aviation market. So it’s not a shock that the strongest operators are making attempts to bolster their position. Analysts have tipped the budget segment to expand at a compound annual growth rate of almost 5% over the next five years.
Rumours abound that easyJet is eyeing up British Airways’ slots at Gatwick if its revived hopes to launch a cheaper airline at the London airport crash. The firm has also talked about expanding its presence in places like Amsterdam, Milan and Berlin in its bid to build “a network of key cities to broaden the Group’s presence across Europe.” Progress on these plans could help the easyJet share price soar beyond its pre-pandemic levels.
Why I fear for easyJet’s share price
I certainly think buying shares in low-cost airlines could be an investing masterstroke. I just don’t think that easyJet is the best way to go about this. For example, Ryanair and Wizz Air are in a much stronger financial position to survive Covid-19 and capitalise on the market opportunities thereafter. By comparison, easyJet remains swamped with debt (£2bn worth as of June).
I’m also concerned that easyJet isn’t raising flight capacity at the same rate as those industry rivals. Indeed, it expects capacity of 60% between October to December versus two years earlier. That’s only fractionally better than the 57% it recorded in the previous quarter. And of course a surge in the number of Covid-19 cases over the winter could put these modest expectations in danger and cause havoc further out. I think the easyJet share price remains under serious threat and would rather invest in other UK shares today.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Wizz Air Holdings. 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.