With profits thankfully at the higher end of guidance, easyJet's (LON:EZJ) main news today is about passenger yields and the outlook. The group projects another “mid to high single digit decline in revenue per seat at constant currency” in the first half of its new financial year, on top of the 6.9% FX neutral slippage this year.
That suggests the group continues to face the sharper end of one the most challenging airline pricing environments of the decade, regardless of high-level records on passengers and load factor.
We are cautious and don’t necessarily assume significant deterioration (if any) in the pricing/overcapacity conundrum since October’s update, and note easyJet is close to optimal positioning in most of Europe’s fastest-growing routes (apart from Ireland and Zagreb in Croatia).
Investors should also be clear that this year’s negative currency damage has almost entirely been due to sterling weakness against euro. As the euro/sterling rate has moderated by some 8% since the extravagant heights of the summer, currency pressures on revenue can also be expected to moderate accordingly in the new year, barring any as yet unabsorbed Brexit-related shock.
For these reasons, we are happy to travel along with the market view that the shares have seen the bottom from specific pressures of the last 18 months (shares are down c.40% in the year to date, but up 20% in 25 sessions).
Despite a similarly tough year ahead in fiscal 2017/18, there are good reasons to believe the market has grown too pessimistic about easyJet, particularly given resilient cash generation and not to mention its flight-tested dividend policy.
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