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The easyJet share price is up 63% this month. Here’s what I’m doing

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The collapse of the easyJet (LSE:EZJ) share price since February is a prime example of how much chaos the pandemic has created for the airline industry. The announcement of multiple Covid-19 vaccines has boosted the share price this past month. But is this increase in the easyJet share price justified?

The airline industry is a cyclical nightmare

Historically, large aerospace companies like International Airlines Group, which owns British Airways, have struggled to create wealth for shareholders.

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Due to the cyclical nature of the industry, there are periods during which returns exceed the cost of capital. They use this newfound wealth to expand their fleet and capacity to try and maximise returns further.

However, once the cycle comes to a close, airliners are left with excess capacity and excess staff that destroy the value of the business – wiping out all previous gains.

easyJet pioneered a new approach to business

Over the past 20 years, low-cost air travel has performed exceedingly well, especially in Europe. They use smaller aircraft and offer travel features – such as food, extra legroom, luggage space, etc. – as bolt-on costs to a base ticket price.

This new business model allowed for significantly reduced operating expenses and enabled the easyJet share price to flourish over the past decade before the pandemic.

While it is still at the mercy of the business cycle, it isn’t as vulnerable as larger aircraft carriers.

Why did the easyJet share price fall?

This isn’t much of a mystery – easyJet’s fleet is currently grounded. Even if no one is flying, there are still expenses that have to be paid.

Fuel costs have certainly seen a decline, but there are many other fees to consider — parking charges at airports, staff salaries, and engineers to maintain the fleet.

When these costs are mixed with a non-existent revenue stream, the result is a £1.3bn loss for 2020 – the first reported loss in easyJet’s 25-year history.

Is the easyJet share price a bargain, or a trap?

The recent boost to the share price is undoubtedly not justified. Given the vaccine is not going to be available until sometime next year, planes will remain grounded until then.

However, unlike my previous analysis of Cineworld, easyJet is in a significantly better financial position. It does have quite a bit of debt, and the recent losses aren’t helping matters. However, the firm does have adequate liquidity.

At first glance, the current ratio of 0.67 would indicate otherwise. But, easyJet has a unique secret weapon that will prevent the need to rely on further debt financing – aircraft sale-leasebacks.

An aircraft sale-leaseback agreement allows an airliner to sell one of its planes to a third party. Immediately after the sale, the buyer leases the aircraft back. Thus, easyJet is quickly able to gain lump sums of cash with no disruptions to operations.

With over half its fleet eligible for such agreements, I believe easyJet will be able to survive until a vaccine becomes available. But it could be a while until the share price recovers back to pre-Covid levels.

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Zaven Boyrazian does not own shares in easyJet. 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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