Airline operators have been among the worst-performing stocks since the onset of the stock market crash. The easyJet (LSE: EZJ) share price has sunk by almost 60% since mid-February.
This comes as no surprise considering the widespread travel restrictions in place as a result of the outbreak of Covid-19. Many airline operators have seen their entire fleets grinding to a halt. easyJet is no exception.
So, with a dirt-cheap valuation compared to pre-crash levels, is now the right time to invest in easyJet shares?
Difficult times
If travel restrictions continue to drag on, the outlook for airline companies becomes even more bleak.
easyJet’s revenue streams have completely dried up and the company is shelling out substantial amounts of cash to cover remaining costs. Nobody knows when its planes will be flying again.
However, it’s not all doom and gloom. This week, according to The Telegraph, the struggling airlines gained a crucial cash lifeline. The government offered loans to certain operators and made provisions for a delay in paying £1bn of air traffic controller fees.
easyJet was quick to tap the government for this help, taking £600m from the emergency scheme. That’s a vital provision that could prove to be the difference between surviving or going under.
Internal disputes
But the current internal dispute between easyJet’s founder and the board of directors particularly concerns me at the present time. The argument appears to centre around the airline’s Airbus order, estimated to cost in excess of £4.5bn.
Founder Stelios Haji-Ioannou argues that the order should be cancelled to preserve cash in a time of immense uncertainty. However, the board appears to be willing to go ahead with the purchase, despite the crisis facing the company.
I think it would be a poor decision to pursue the Airbus order, especially in light of the current economic climate, which even throws the future of air travel into certainty.
The future of air travel
The lasting impact of the Covid-19 pandemic on air travel remains to be seen. With air passenger volumes at rock bottom, analysts at Stifel predict that travel demand won’t return to pre-Covid-19 levels until mid-2021, even in a best-case scenario.
On top of this, Stelios has urged the reduction of the airline’s fleet by 100, arguing that the company won’t need any additional new planes for many years to come. This contrasts with the board’s attitude, as it insists on going ahead with an order of another 107 new aircraft.
All things considered, I think there are safer companies to invest in during this market crash that offer the prospect of attractive returns. That said, if you’re feeling particularly bullish about the recovery and future growth of easyJet, the current share price may be a bargain.
The company’s price-to-earnings ratio is currently around just over 7, that’s substantially lower than this time last year, where the figure was closer to 22.
Regardless, the challenges facing the company, and the aviation sector as a whole, are unprecedented. I’ve previously been bullish about easyJet, but I’m now inclined to look for bargains elsewhere in the index.
