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Why I think the easyJet share price could gain from the Thomas Cook collapse

The failure of Thomas Cook earlier this year left a hole on the package holidays business, and it’s one that easyJet (LSE: EZJ) is hoping to fill.

And in what sounds like it might be an even more ambitious goal, easyJet says it intends “to become the world’s first major airline to operate net-zero carbon flights by offsetting the carbon emissions from the fuel used on the flights.”

Full-year results were in line with expectations, after revenue to 30 September came in at £6,385m, 8.3% ahead of 2018’s £5,898m. And though headline pre-tax profit dropped 26% from last year’s £578m to £427m, it was in the upper half of the airline’s guidance range of £420m to £430m.

Lowered costs

The airline has been cutting costs too, with savings from its cost and efficiency programme reaching £139m, significantly ahead of last year’s £107m. That’s good, but whenever I read of a company engaging in cost saving plans, I can’t help wondering why that isn’t just the norm.

At constant currency and excluding fuel, headline cost per seat was reduced by a modest 0.8% to £43.11. Including fuel and currency movements, however, that cost per seat rose by 1.5% to £56.74. These might sound like minor differences, but in the cut-throat world of cut-price airlines, a few pennies saved per seat can make a meaningful difference to bottom line earnings and to the cash available for dividends.

And speaking of dividends, this year’s amounts to 43.9p per share, down from the 58.6p paid last year, but close enough to expectations. On the current share price, that’s a yield of 3.3% – not one of the top dividend champions, but comfortably covered by headline earnings per share of 88.7p.

New plans

Carbon offsetting is estimated to cost around £25m, and involves paying for various processes that take carbon dioxide out of the air – but it doesn’t actually reduce the overall net emissions. As such, I don’t see it as anything to get too excited about, though easyJet did say it’s just an interim measure and that it will push for the “development of sustainable fuel and electric flying.

Electric aviation is a long way away, however, and I really don’t think it need figure in the thinking of investors today. Whether the carbon offsetting will justify its cost and how competitors will react is something we’ll have to wait and see.

The move into the package holidays business seems to me to offer significantly bigger tangible gains. And more immediate ones too, as as easyJet holidays is set to launch in the UK before Christmas, offering beach and city breaks. The potential looks to be there, as easyJet says currently around 20m people book flights per year with it, but only around 500,000 book accommodation.

Tempting buy?

The drift away from high street travel agents for booking holidays also seems to fit with easyJet’s new package business, and it has the logistics and infrastructure to manage the move.

Would I buy easyJet? Easy answer, no. I like these new moves, but the airline business is horribly competitive and hostage to the price of fuel. Though easyJet is possibly the best in the business, its shares are still down 20% over the past five years, and that’s all I need to know.

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Alan Oscroft 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.