Can the easyJet share price bounce back to pre-pandemic levels?
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The easyJet (LSE:EZJ) share price hasn’t had much luck in October. Starting at around 700p, the stock has continued its downward trajectory. And while the last two trading days saw some upward movement, it’s still down about 8.5% since the start of the month. Although it’s worth noting that despite this volatility, the 12-month performance stands at a fairly impressive 60% return.
Last week, the company released its latest trading update that showed some encouraging signs of progress. So, is now the time to add this business to my buy list? Let’s take a look.
A chance for the easyJet share price to recover
The initial collapse of the easyJet share price is pretty self-explanatory. As Covid-19 spread worldwide, travel restrictions were put in place and borders closed. While necessary, this decision decimated the travel industry, easyJet included. With vaccines being rolled out, travel rules are getting looser. And easyJet is now able to once again provide its transportation services, even if it’s at a reduced capacity.
Looking at the latest trading update, the firm’s recovery seems to be making some solid progress. Passenger capacity in its fourth-quarter came in at 58% of pre-pandemic levels. This is actually slightly lower than the 60% guidance. However, it’s still up from 17% last quarter. And management expects this figure to continue rising to 70% over the next three months.
As a result of more seats being filled and new cost savings initiatives, the firm’s losses have been partially mitigated. Consequently, total losses for the year are now expected to be in the range of £1.14bn to £1.18bn. That’s still a substantial amount of money to lose. But the company currently has around £4.4bn of liquidity at its disposal. Therefore, meeting its near-term financial obligations shouldn’t be an issue. And providing that its recovery progress continues, easyJet should be able to return to profitability, taking its share price with it.
The threats on the horizon
The pandemic may be slowly coming to an end. However, the ongoing impact of the Delta variant could lead to existing travel restrictions remaining in place for a prolonged period. This could hamper the firm’s ability to raise passenger capacity levels moving forward.
However, ignoring the effects of the pandemic, there’s another major threat, I feel. Namely, oil prices. Last week oil prices reached a three-year high at $85/barrel due to forecasts of looming supply deficits. Unfortunately for easyJet and, in turn, its share price, oil is the primary ingredient in jet fuel.
Management has hedged around 55% of its fuel requirements using financial derivatives to keep half the costs static. But that still leaves 45% at the mercy of rising oil prices. And as fuel becomes more expensive, easyJet’s margins will likely get tighter.
The bottom line
After following the company’s progress throughout 2021, it’s clear to me that management’s recovery strategy is working. At least for now. But there remains a lot of short-term uncertainty surrounding this business that may continue to push the easyJet share price down over the next few months.
Therefore, I’m going to stay on the sidelines for now and wait to see what happens.
Zaven Boyrazian 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.