The easyJet (LSE: EZJ) share price was in fine fettle this morning (18 April) following a well-received half-year update from the budget airline. What’s got investors smiling and, more importantly for long-term Fools like me, can it last?
Reduced losses
The main reason for today’s 4% rise (as I type) is that the company’s managed to reduce its “winter losses” by more than £50m year on year, due to keeping non-fuel costs steady. A headline pre-tax loss of £340m-£360m is now expected.
All this might seem pretty strange. Since when is making a loss something to celebrate? Well, the key thing to realise about easyJet’s trading is that the first half is always a bit subdued. The second half of its financial year — which includes the summer months — is when the firm really makes its money.
That momentum’s clearly growing as the months pass. Looking into the numbers a little deeper, the firm highlighted a good performance in Q2 with both passengers and revenue per seat (RPS) up 8% year on year. This was also ahead of previous guidance. Its package holiday arm reported a pre-tax profit of £31m — a rise of over 200% year on year.
The fact that all this was achieved despite significant geopolitical headwinds is pretty remarkable to me.
Commenting on today’s numbers, long-standing CEO Johan Lundgren reflected that the company was “well set up operationally” for a busy summer with an increase in the volume of bookings compared to the same period in FY23.
So how much of this is now reflected in easyJet share price?
Still cheap?
My tentative answer is ‘not enough’. Prior to this morning’s update, easyJet shares changed hands for eight times forecast earnings. That’s pretty average relative to sector peers. However, it looks to be great value relative to the rest of the UK market.
If easyJet’s summer goes to plan then further upside looks likely. But if this is accompanied by a cut to interest rates and/or a cessation of military conflicts then we could see a stampede for the shares.
Dividends are back
Obviously, nothing’s a given. A worsening of geopolitical tensions could easily see investors run for the exits again. Although not a huge contributor to trading, the £4bn-cap has already made the decision to suspend flying into Israel for the summer.
It’s also worth remembering that investing in airlines is never a smooth ride. For evidence of this, anyone buying the stock five years ago would have seen the value of their holding nearly halve. If ever there was an argument for maintaining a diversified portfolio, here it is.
I suppose at least easyJet has resumed paying dividends again. A forecast 2.5% yield is pretty average. However, it’s expected to be extremely well covered by profit. Unless there’s a serious wobble in trading, I’d say the probability of actually receiving this payout looks pretty high.
The big recovery is (possibly) on
All told, I think today’s rise in the share price is justified and I’m cautiously optimistic on easyJet’s outlook and ability to recover strongly in time. But patience, as ever, is key.
Since I already have exposure to the travel industry via holiday firm On the Beach however, I won’t be investing here today.
