EasyJet hits turbulence

These are the "best of times for European air passengers", says Chris Bryant on Bloomberg Gadfly. But "for airline investors, it's hard to imagine how things could possibly be worse".

Shareholders in easyJet(LSE: EZJ) have had a remarkably successful run over the last few years. In a notoriously cut-throat business, the company has managed to deliver an increase in profits every year since 2009. But last week it said that it expects pre-tax profits for the 12 months to 30 September to fall by some 28% compared with last year. Shares slumped to their lowest in over three years on the news, and are down by almost 50% in the last year.

Carolyn McCall, the airline's chief executive, blamed "extraordinary events". Terrorist attacks in Nice, Brussels and Paris and air-traffic control strikes in France have all disrupted schedules, and the tumbling pound is expected to wipe £90m off the airline's profits this year. "Every 1% of the pound weakening versus the US dollar pushes the fuel bill up roughly £10m", said analysts at Societe Generale. And while it's true that the airline is carrying 6.6% more passengers, they're paying 8.7% less for their seats.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

McCall is betting on expansion to see easyJet through the tough times "history shows that at times like this the strongest airlines become stronger", she says. "The airline grew capacity by 5.8% during April-September," says Royston Wild on Forbes.com, "and plans a further 8% hike in the current year." That should leave it "in good stead to enjoy splendid revenues growth once its current troubles subside".

But others aren't so optimistic. Adding capacity is the wrong way to go about things, says Bryant. If the airline industry wants to preserve shareholder value, it needs to consolidate. If it keeps "seeking salvation through expansion, fares will fall further, and so will earnings and airline stocks". "Europe's airlines are their own worst enemies," he adds. By contrast, US airlines, which have been through a period of consolidation, are "far more profitable than European rivals".

Quite, says Nils Pratley in The Guardian. Europe's short-haul market "has too much capacity", with "cheap oil" fuelling too much expansion. One comfort for shareholders is the "chunky" dividend, which yields 5.7% "at the reduced share price".

But that might not be enough to tempt investors. "Prospects for earnings themselves are the real worry. One tough year could be viewed as exceptional, but the City is expecting at least three before the clouds clear." Not all investors may be willing to wait that long, says Bryce Elder on FT Alphaville. "If I were a shareholder," he says, "I'd be asking questions."