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Will the easyJet share price bounce back?

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An easyJet plane takes off
Image source: London Luton Airport

Last week’s decision to put Portugal on the amber list for UK travellers was a big disappointment for easyJet (LSE: EZJ). But markets had already turned cautious on airlines — the easyJet share price fell steadily for most of May.

The airline’s shares have fallen by nearly 10% over the last month, trimming the stock’s 12-month gain to 15%. Travel restrictions may continue a while longer, but easyJet has plenty of cash on hand to survive short-term setbacks — is now the right time for me to buy the stock?

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Three good things

Let’s start with the good news. easyJet has completed its “largest ever” restructuring and cost-cutting program over the last six months. This has included redundancies, pay cuts, and changes to working hours for flight crew.

Assuming that air travel returns to normal later this year, I think easyJet’s profitability could recover quite quickly. This could support a higher share price, despite the dilution from new share issues.

The next few months seem likely to be difficult, but easyJet still has plenty of cash on hand. The airline reported £2.9bn of cash and unused debt at the end of March. CEO Johan Lundgren does not expect to need more financing unless the 2022 summer season is disrupted.

Finally, I think that easyJet’s low-cost structure, large size, and short-haul focus mean that it could take market share from higher-cost flag carrier airlines when air travel recovers. This could help easyJet recover more quickly than some rivals.

The bad news?

It’s not all good news. Airline industry body the IATA estimates that passenger numbers in Western Europe won’t return to 2019 levels until the end of 2023. This worries me because many of the costs involved in running an airline are fixed. They don’t change when passenger numbers fall.

What this means is that while easyJet is flying at reduced capacities, its costs per seat are much higher. This makes it harder to fly profitably. I think this could put pressure on easyJet’s share price for some time yet.

Some of these increased costs should fall away quickly when travel restrictions are lifted. But some won’t. One area that concerns me is easyJet’s aircraft finance costs. These have risen sharply due to higher debt levels and an increase in the number of leased aircraft in easyJet’s fleet.

These changes helped the airline to raise funds last year, but this money must now be repaid.

easyJet share price: my decision

My sums suggest that at a share price of 1,000p, easyJet shares are valued at around 12 times historic peak earnings. This suggests to me that the market has already priced in a strong recovery in air travel.

I’m also worried that it may take longer than expected for easyJet’s profit margins to fully recover. Although some operating costs should be lower, I think these savings may be offset by higher finance costs.

On balance, I think easyJet’s share price is probably high enough at the moment. I don’t see any good reason for a higher valuation, but I can see some potential risks. I’m not interested in buying at this level, but I do think that easyJet will remain one of the better airline stocks.

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Roland Head 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.

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