No industry has a more uncertain future than air travel. Planes are grounded, and the Government has announced that any passengers landing in the UK must quarantine for 14 days. Yet this morning, travel and leisure stocks across the FTSE rose sharply as airlines announce their plans for the summer. The easyJet (LSE:EZJ) share price has risen over 15% since opening, buoyed by reports that Germany is planning to lift travel warnings for 31 other European countries from June 15th.
The travel industry has almost collapsed as a result of the coronavirus pandemic, with airlines cutting hundreds of thousands of flights and taking thousands of planes out of service. Air travel may not return to pre-coronavirus levels until mid-2021, at the earliest. Airlines will likely need to reduce their fleet sizes to match future flight capacity and reduce long-term costs. Billionaire investing guru Warren Buffett has dumped all his holdings in US airlines, fearing “the world has changed” for the travel industry. Can UK airlines like easyJet navigate their way through the cloudy future?
What is management’s plan to lift the easyJet share price?
The easyJet share price dropped from its February high of 1,552p to a low of 475p in April. That’s a 70% drop. A large part of its fleet could continue to be grounded while the company pays its costs. This will lead to an uncertain financial future for the business. However, it has been able to reduce costs and access funding arrangements in recent weeks to improve its outlook.
The low-cost carrier announced that its initial schedule will involve mainly domestic flying in the UK and France. UK airports to be served by easyJet from June 15 include Gatwick, Bristol, Birmingham, Liverpool, Newcastle, Edinburgh, Glasgow, Inverness and Belfast. However, the only international route from the UK will be between Gatwick and Nice, France.
Despite the recent drop in easyJet’s share price, it is not necessarily a bargain. Looking at the company’s financial statements reveals a few weaknesses that may discourage investors. Though revenues are up – the past five years have shown strong revenue growth – earnings are declining. easyJet earned 37% less in 2019 (before coronavirus) than it did in 2015. The operating margin has been cut in half since 2018, from 14.7% to 7.3%. Yet the company’s shares were still selling at a higher P/E ratio than they were in 2015. That suggests easyJet may be overvalued.
Current assets and liabilities also highlight weaknesses. Far from having a strong current ratio, net current assets are over half a billion in the red. Total current liabilities have risen almost £500m since 2018.
This weak financial data is also accompanied by infighting between the easyJet’s founder, Stelios Haji-Ioannou and the board of directors. A dispute over an order of Airbus aircraft lead to Mr Haji-Ioannou calling a vote to remove four members of the board including the CEO and the CFO. Despite shareholders backing the board members in the vote, CFO Andrew Findlay has announced his resignation from the company today.
Whether buying 100 new aircraft at £4.5bn – when your current fleet is grounded – is wise remains to be seen. Stelios, who owns 33.7% of the company, has been arguing for years that the fleet should be reduced from 344 planes to 250.
Against this backdrop, and with this level of uncertainty, it seems a big task to get the easyJet share price back to its pre-coronavirus levels. If you’re thinking of investing, you better wear your safety belt and check your lifejacket is stowed beneath your seat.
Toby Aston does not own shares in any of the companies 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.