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easyJet braced for break-even but costs and demand risks are eyed

Published 29/11/2022, 05:34
Updated 29/11/2022, 06:11
© Reuters easyJet braced for break-even but costs and demand risks are eyed

© Reuters easyJet braced for break-even but costs and demand risks are eyed

Proactive Investors - When easyJet (LON:EZJ) PLC reports results this coming week, investors already know that losses will be less than a fifth of the previous year but it is not yet ready to restart dividend payments.

Its shares are up by a third in the past month, propelled by October’s bullish fourth-quarter update, which guided to pre-tax losses in a range of £170mln and £190mln, down from over £1bn a year earlier.

Excluding the foreign exchange, disruption items and interest, it will be close to break-even.

The budget airline – which is rumoured to be in the sights of British Airways (LON:ICAG) owner IAG – will also have some other important details up its sleeve.

“Focus will be on current trading and capacity deployment during the course of 2023,” said analysts at UBS, who also say it is likely that management will also update on cost control efforts.

Back at its pre-close trading update in October, the FTSE 250-listed carrier said it expects capacity in the first quarter of its 2023 financial year will be up 30% year-on-year at around 20mln seats, around 83% of pre-COVID-19 levels, with booked load factors ahead of the same point in 2019 and yields “robust”.

Boss Johan Lundgren hailed the group’s presence as “Europe's largest operator at primary airports with one of the strongest balance sheets in the aviation industry” and, while acknowledging the uncertain macroeconomic environment, said its business model enable it to “provide low fares to millions despite the rising cost of living”.

Broker Liberum was mainly supportive, saying that, so far, “there are no signs of demand softening”, though visibility for summer 2023 is “very limited”.

Analysts added: “It may be that the shares continue to struggle until there can be confidence in summer trading, but the balance sheet is strong, and the valuation is undemanding and not reflective of recent structural improvements.”

However, analysts at AJ Bell note that EZJ shares are still barely above where they were ten years ago, "thanks to lingering concerns about COVID, as well as lofty oil prices, fierce competition, the war in Ukraine and the possibility that a recession will dampen consumers’ willingness – and ability – to book holidays, especially as inflation drives up their bills for essentials such as food and heating".

For the coming year to September 2023, analysts are forecasting easyJet's first profit since 2019, having pencilled in an operating profit of £351mln and a profit before tax, interest and other financial items of £233mln.

A big factor in cost per seat is fuel, which has been elevated this year - though easyJet has 69% of its fuel costs in the first half of fiscal 2023 and 44% in the second.

"A further sign of management’s confidence in the recovery (or lack of it) would be any changes to its aircraft purchasing plans," the AJ Bell analysts said, having rearranged delivery schedules with Airbus during the pandemic to avert another big bust-up with founder Stelios Haji-Ioannou over a planned US$6.5bn order for 56 new aircraft.

Currently, the plans is to take nine deliveries in 2022, six in 2023, 18 in 2024 and 26 in 2025, with the result that the fleet will grow to a maximum of 337 aircraft by 2025, though that could go as low as 276 if easyJet lets leases lapse.

To cover these purchases, as well as leases and maintenance payments, capital expenditure is expected to be £800 million in the year just ended, rising to £1bn in 2023 and £1.8bn in 2025.

Read more on Proactive Investors UK

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