Back in February, the easyJet (LSE: EZJ) share price briefly topped 700p. The budget airline’s shares have halved since then, as shambolic airport delays and recession fears have caused investors to flee the aviation sector.
Some of easyJet’s problems have been outside its control, but I think some have been self-inflicted. My guess is that this is why chief operating officer Peter Bellew resigned at the start of July, when flight cancellations and airport disruption were at their worst.
A bargepole business?
It would be easy for me to say that easyJet shares are too risky, and that I wouldn’t touch them with a bargepole. However, I don’t believe this is true.
Airline stocks certainly carry some extra risk, in my view, due to high levels of debt as a result of the pandemic. However, the budget airline model is well proven and easyJet is one of the larger operators in this sector.
I’m confident the orange-topped airline will return to profit and long-term success. I’m also encouraged by the appointment of turnaround specialist Stephen Hester as chair of the board.
Mr Hester was previously in charge of turnarounds at Royal Bank of Scotland (now NatWest Group) and RSA Insurance, which he sold in a takeover deal.
Hester is a well-respected figure in the City. I don’t think he’d have taken on this challenge without being confident he could unpick easyJet’s problems and return the business to health.
Saving millions on fuel
easyJet hasn’t done everything right this year. But it has scored some important wins.
One big win for management was putting in place a comprehensive fuel hedging programme. This has allowed easyJet to buy jet fuel at up to 50% below the market rate at times this year. Partial hedging is in place for next year, too.
The company has also made good progress with its operations. CEO Johan Lundgren expects to have flown around 90% of 2019 flight capacity during the three months to 30 September.
Broker forecasts suggest this late recovery could help lift revenue for the full year to £5,566m. That would reduce the group’s net loss for the year to around £100m. That’s still a lot of money, but 2021/22 should be the last year of pandemic losses.
Forecasts for 2022/23 suggest easyJet could generate sales of £7,665m and a profit of more than £250m. That would put the shares on a price-to-earnings ratio of 10, which doesn’t seem too high to me.
easyJet shares: why I’d buy
There’s still a lot for the airline to do to repair the damage caused by the pandemic and its own errors. But I think easyJet shares probably offer good value today, on a long-term view.
A short trip to Spain is always going to be more affordable than a fortnight in the Caribbean. I reckon easyJet’s big share of the budget short-haul market should help it to return to profitability over the next year, even if the UK does fall into recession.
easyJet’s high level of debt means that I’d only make this a small position in my portfolio. But I do see the shares as a long-term buy at current levels.
