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Why I see the easyJet share price hitting new lows by 2020

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Brexit and the circumstances in which it eventually comes to pass will no doubt have a significant impact on equity markets, particularly those in the FTSE 100 and even more so on airlines such as easyJet (LSE: EZJ).

But are some underperforming stocks using the United Kingdom’s departure from the European Union as a way to paper over the cracks within?

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Brexit, Brexit, Brexit

On Monday budget airline easyJet saw its shares drop more than 8% following a dampened outlook statement, blamed in part on weaker demand for air travel due to ongoing uncertainty surrounding Brexit.

CEO Johan Lundgren said that ”softness in both the UK and Europe” was weighing on the airline, and although losses can be expected from those in the sector during the winter months, easyJet appears to be particularly affected this year.

Over the past year the easyJet share price has plummeted, dropping over 25% excluding dividends.

Revenue per seat for the first half of 2019 is expected to be 7.4% lower, while costs are set to increase, leading to the sell-off at the beginning of the week. There is little to suggest that this trend will be reversed in the coming months.

Analysts rushed to back the budget carrier despite the cautious outlook, asserting that once more clarity exists around Brexit, easyJet should be set for take-off.

However, it’s not just the UK’s departure from the EU which is weighing heavily on airline shares. Boeing’s recent troubles with its aircraft is also continuing to have a negative effect on the sector, while rising fuel prices also represents a challenge.

The recent collapses of Wow Air and Primera Air is testament to the challenging environment facing airlines, not only because of ongoing uncertainty caused by Brexit.

Hard Landing

On the face of it easyJet’s financials appear solid, and bullish commentators point to a 5.3% dividend yield as an attractive prospect for investors, but increased competition and rising costs combined with little action to combat those factors are the reason why I’m not buying at a share price over 1,060p.

Losses are expected to be around £275m for the first six months of 2019, compared to £212m in the corresponding period in 2018. Brexit or no Brexit, that’s a significant pushback to which there appears to be little resistance.

And what of the increased ‘certainty’ when the B word finally reaches a satisfactory conclusion? Who’s to say at this stage that the certainty that we arrive at won’t be a no-deal Brexit?

According to the company, it will be “flying high as usual”, regardless of the outcome of the parliamentary wranglings and ongoing negotiation surrounding Theresa May’s deal, but there is a mixed message there from easyJet which adds further uncertainty to current and potential shareholders.

The shares have regrouped somewhat since Monday’s statement, but only time will tell whether Brexit is the be-all and end-all for easyJet’s share price.

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Conor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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