Airline stocks like easyJet (LSE:EZJ) have been experiencing severe share price turbulence of late. It’s up 3% on Tuesday (10 March), but remains 18% lower than it was 12 months ago. But could the FTSE 100 share be about to stage a sustained recovery?
Analysts are confident easyJet shares will rise from current levels. Actually, that’s a massive understatement. Largely speaking, City brokers expect them to rocket higher over the next year. Seventeen analysts currently have ratings on the budget airline. The average share price target among them is 579.4p, up 43% from current levels of 406.4p.
One analyst is even more bullish, predicting easyJet’s share price will almost double over the period. Their price forecast is 800p, representing a 97% premium from today. But in the current climate, how realistic are these estimates?
Bouncing back
As I say, the airline has risen sharply today on hopes that conflict in the Middle East could be over soon. President Trump said on Monday that “the war is very complete“, following airstrikes exchanged between the US and Israel and Iran in recent weeks.
The conflict has had significant ramifications for airlines. easyJet cancelled flights to and from Cyprus in recent days, one of several carriers to experience disruption.
This, though, hasn’t been the main danger for the FTSE 100 firm. The threat of higher fuel costs has pushed its share price sharply lower since late February, as the conflict affects oil supplies. Brent crude has surged over the period, and yesterday touched four-year highs near $120 a barrel.
Are there other dangers?
Oil has since retreated to around $91, helping easyJet shares recover today. The problem for me, though, is that a prolonged conflict is still a possible scenario with airstrikes continuing. And it isn’t just the problem of surging fuel costs airline investors must consider.
Soaring crude prices will raise broader inflationary pressures, and by extension consumer appetite for luxuries like holidays abroad. On the plus side, easyJet may not be hit as hard as other airlines. In fact, its focus on value could support revenues as travellers switch down from more expensive operators. Yet on balance, rising inflation is likely to be a negative for ticket sales.
Are easyJet shares a buy?
Developments in the Middle East are all the more worrying given easyJet has already been showing signs of trouble. Headline costs rose 13% in the December quarter, which contributed to pre-tax losses widening to £93m from £61m a year earlier.
The good news is demand for its plane seats and package holidays remains strong, and the firm is ramping up airline capacity to capitalise on it. Revenues were up 11% in Q1. The question is, can sales keep soaring as economic and geopolitical uncertainty grows? And even so, could this offset the problem of rising costs and large operational investments going forwards?
On both questions, I’m not so sure. And by extension, I’m not convinced that easyJet’s share price will rise as sharply as City analysts are expecting. More adventurous investors may want to take a close look. But I won’t be buying the airline for my portfolio.
