Up, up and away. Not only does that describe the holiday dream of many passengers on easyJet (LSE: EZJ), it also sums up the recent moves in the budget carrier’s share price.
The stock has jumped 50% since the turn of the year. Over the longer term, things have been less rewarding, with the company trading 11% below its price a year ago.
Still, there seems to be real momentum at the moment. What explains that – and is there runway for further price increases that could justify buying easyJet for my portfolio?
Soaring demand
A trading update earlier this month gives an indication of why the easyJet share price has been soaring.
Passenger numbers in the final quarter of last year and first three months of 2023 grew 35% compared to the same periods a year earlier. Not only that, revenue per seat jumped 43%. That shows the benefit to the airline’s top line of higher pricing and filling a larger percentage of seats on its flights.
This fed through into the company’s finances, with net debt falling two thirds to £0.2bn. A strong balance sheet was historically one of the attractions of investing in easyJet when compared to some peers in the aviation sector, so I am pleased to see its debt being reduced substantially.
For the next six months, easyJet plans to offer around 9% more seats than in the prior year period.
Still not profitable
But while those performance figures look good and there is the prospect of higher demand ahead, the company is still not out of the clouds.
In the six month period, easyJet reported a headline loss before tax of £415m. While that is a substantial improvement from the same period a year ago, it is still a large loss.
Will things get better, helping to justify the rise in the easyJet share price? The airline thinks so, saying it expects to exceed current market expectations of a £260m profit for its full financial year. That suggests a sharply improved performance in the second half.
Time for take-off?
Still, is that outlook enough to justify the current easyJet share price?
Even after the share price rise, easyJet still has a market capitalisation of only £3.8bn. The shares are 67% cheaper than five years ago. That might look like a bargain.
However, the airline is very different to five years ago.
Yes, it still benefits from a proven business model, strong brand and good liquidity. But it is also indebted and currently lossmaking, even though it expects to break into the black soon.
It faces risks such as ongoing high oil prices and the potential for further aviation demand disruption in future. A key lesson from the pandemic is how vulnerable a successful airline can be to such an unforeseen event.
I think the share price already factors in the positive outlook. Now it is time for easyJet to deliver, to justify the sharp increase in valuation this year. For now at least, I have no plans to invest.
