Since it came to light earlier this week that the US and Iran have agreed to a two-week ceasefire, easyJet (LSE: EZJ) shares have jumped. Had an investor put £10,000 into the budget airline operator two days ago when the share price was near 360p, that capital would now be worth about £10,650 – a brilliant return in just two days.
Is it too late to get on board this airline stock? Let’s take a look.
Can the share price return to 500p?
Before the Iran war kicked off, easyJet shares were trading near 500p. We can’t just assume that the share price will return to this level if the geopolitical conflict ends though.
One major issue is oil prices. These have shot up due to the closure of the Strait of Hormuz and they could stay elevated for a while even if the conflict ends and this vital oil corridor reopens. This increase could put pressure on easyJet’s earnings, because fuel is typically one of the largest costs for airlines.
Note that last month, easyJet said that it has hedged the majority of its fuel needs for the coming months, but by the end of the summer those hedges start to come off. So if oil prices remain elevated beyond the end of summer, the company could be looking at dramatically higher costs (the price of jet fuel today is around $1,700 per metric ton versus easyJet’s hedged price of around $700) and therefore lower profits.
What about demand?
We also need to consider secondary effects of high oil prices. One that can’t be ignored is consumer spending weakness. If oil prices remain elevated, consumers are likely to have less disposable income because more of their cash will be going towards petrol, heating, and food (there’s talk of UK food prices rising 10% this year due to the Iran conflict).
This could be a major issue for easyJet because it’s a budget airline and many of its customers are lower down on the earnings spectrum (this demographic tends to be hit harder by inflation than wealthier consumers). It could be impacted more than premium airlines such as British Airways and Virgin Atlantic, which tend to serve more affluent consumers.
It’s worth pointing out that easyJet has said ticket prices will rise towards the end of the summer due to the Iran war. This could further reduce demand.
Worth the risk?
So there are some big risks to the investment case here. I think it’s unlikely that the shares will suddenly fly back to 500p. That said, I do see potential for further share price gains if the geopolitical backdrop improves significantly. If we see a major de-escalation, and a full opening of the Strait of Hormuz, I’d expect the stock to move higher.
Bottom line: people still want to travel. This is illustrated by the fact that easyJet bookings in January were the strongest ever and demand for easyJet holidays (a key growth driver for the group) was high. So the shares could definitely be worth considering as a recovery play. Investors need to be prepared for turbulence though.
