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EasyJet shares: What I’d do given the rally

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EasyJet (LSE:EZJ) is one of the leading low cost airlines in Europe. In 2020, shares have fallen on tough times due to the pandemic. Year-to-date, easyJet shares have declined over 40% and the company has had to raise money from shareholders. 

With the recent positive vaccine candidate news, however, easyJet shares have rallied in the past month. Given the better than expected potential efficacy of Pfizer‘s and Moderna’s vaccine candidates, there is more hope that things will return to normal faster. 

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In view of the rally, here’s what I’d do with easyJet shares.

EasyJet shares: The company has many attractive qualities

To me, EasyJet has many attractive qualities. First, the airline is well positioned in key markets in Europe with large populations and substantial GDP. The company also has a strong brand where many customers use the airline more than once. 

With its proximity to many potential travellers and repeat customers, the airline can spend less on marketing to get business. To me, the marketing advantage makes easyJet’s already low cost base even more of a competitive advantage. 

Second, the airline is attractive to me because its business focuses on the short haul/leisure markets. With the data so far, many analysts expect the short haul market to rebound faster than the long haul market. 

A faster demand rebound could mean a faster earnings rebound. 

When will air travel recover?

In terms of when air travel will recover, expectations were pretty gloomy but have recently brightened. While easyJet hasn’t given guidance past the first quarter of next financial year, some other airlines have given their outlooks. 

According to the management of fellow low-cost airline Ryanair, the easyJet competitor expects a pretty decent recovery with passenger volumes reaching 75%–80% of their pre-pandemic levels by next summer, assuming vaccines are developed by spring. 

Ryanair CEO Michael O’Leary said, “I’ve heard a lot of rubbish coming from legacy airlines that it’ll be 2035 till the volumes come back. Rubbish. Volumes will go back in 2021 or 2022 pretty quickly – they will go back because Ryanair will discount prices, hotels will discount.”

Near-term challenges

Although next summer could bring good news, the near term could be challenging. EasyJet burned £651m for the quarter ended 30 September. It could be a tough quarter ending on the last day of December too, which is the company’s first quarter of fiscal year 2021. EasyJet said, ‘based on current travel restrictions in the markets in which we operate, easyJet expects to fly no more than c.20% of planned capacity for Q1 2021’. 

Given the current enterprise value and the potential cash burn until summer, I’d follow easyJet shares but I’d wait until there is more data and guidance before making any decision. 

There is currently still a lot of uncertainty given future demand, the vaccine approval timeline, and the distribution of vaccines. 

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Jay Yao 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.