What are the short-term prospects for the easyJet business? Looking at what has happened to easyJet shares, the answer seems unpromising.
The share price has tumbled 31% so far this year and now sells for just five times earnings.
But as a long-term investor, I am taking a wider view of things. Clearly, easyJet is suffering major turbulence at the moment, as are many of its industry peers. But could that potentially offer an attractive share price from a long-term perspective?
Immediate pain, and more pain to come
The Middle Eastern conflict has hurt civil aviation in multiple ways. Expensive jet fuel eats into profitability. easyJet has agreed the purchase price of much of its fuel needs in advance. But that does not cover all of the airline’s requirements and current agreements will only last for a matter of months, in any case.
Passenger demand on some routes has fallen and that could happen more broadly as nervous flyers decide to give air travel a miss during a war. Meanwhile, the global economy is weakening. That may lead more passengers to decide to holiday closer to home rather than venturing far away.
Not only are these negative factors, but they will not go away any time soon. In terms of jet fuel pricing, travellers’ confidence and economic performance, the damage has already been done.
Even if the war ends imminently, it will take months or even years for its impact in these areas to unwind.
easyJet looks well-positioned for the long run
easyJet has already told investors to buckle up as we are in for a bumpy ride. It has said it expects a headline loss before tax of £540m- £560m for the first half. That is equivalent to around a fifth of its entire market capitalisation.
Will that be the extent of the financial fallout for the company from the current Middle Eastern crisis, or could there be more to come? Nobody knows for now. Only time will tell.
easyJet has been through tough times before, notably during the pandemic. Its shares crashed by around 70% over a couple of months in the first half of 2020. But they then more than doubled in just over a year from that low point.
The business has a playbook for handling this kind of disruption. It has net cash of over £400m and more than 10 times that in liquidity, meaning that if it needs to borrow more cash to fund operations it ought to be able to do so.
With a historically-proven business model, strong brand and extensive route network, I think the airline looks well set for recovery at some point, provided the current crisis does not drag on for too long.
Why buy now?
On that basis, I believe that easyJet shares at their current price could well turn out to be a long-term bargain. However, there are a lot of unknown factors here that are outside the firm’s control. Things could get worse before they get better.
On that basis, I am in no rush to invest. I would rather wait for a while and see how events develop rather than tie up my money now in a company that continues to face multiple challenges of an uncertain duration.
