Third-quarter profits at EasyJet have increased by 16%, with the budget airline saying it is on track for a record summer. Could this be a good time for airline and travel stocks?
The airline reported headline pre-tax profits of £236 million for the three months to June 30, up by £33 million on a year ago. The news comes as rival Ryanair reported first-quarter profits plummeting to €360 million – 46% lower than the same period a year ago.
EasyJet's chief executive Johan Lundgren says: "Our strong performance in the quarter has been driven by more customers choosing easyJet for our unrivalled network of destinations and value for money. We remain on track to deliver another record-breaking summer."
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The airline carried 8% more passengers in the quarter at 25.3 million and said trading was additionally bolstered by strong demand for EasyJet Holidays, with the unit seeing pre-tax profits rise to £73 million from £49 million a year earlier.
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EasyJet now expects the holidays arm to deliver annual pre-tax profits of more than £180 million, up almost 50% year-on-year.
Adam Vettese, market analyst at investment platform eToro says: “Shares have pared all of this week's losses following this morning's update but are still slightly offside for the year.”
Meanwhile, an early Easter was partly to blame for Ryanair's problems, with half of the holiday period falling into the previous quarter. The airline said its traffic was up 10%, but that airfares were weaker than expected.
“While Q2 demand is strong, pricing remains softer than we expected, and we now expect Q2 fares to be materially lower than last summer,” said Ryanair chief executive Michael O’Leary. Previously, fares had been expected to be flat, or to rise modestly.
Dan Coatsworth, investment analyst at AJ Bell, notes that lower fares put more pressure on airlines to “put bums on seats and fill planes to maximise revenue potential”.
Should you invest in airline stocks?
Although Ryanair’s woes don’t bode well, EasyJet’s results are promising. One in three Brits is planning both an overseas holiday and a UK staycation this summer, according to recent research from American Express. What is more, nearly two-fifths are planning to spend more on overseas holidays this summer than last year.
This suggests the demand for travel is certainly there – even if consumers are still navigating cost-of-living pressures, such as high mortgage rates.
However, it is worth remembering that airlines operate in a highly competitive sector with customers ruthlessly shopping around for the lowest fare. They are also heavily exposed to fuel prices, which can contribute to volatile share price performance.
Finally, running an airline comes with a lot of costs. Buying or leasing planes, and then maintaining them, does not come cheap. This often means airlines have a high debt-to-equity ratio compared to other sectors.
In short, these factors combined can make for a bumpy ride for investors. If you are looking for a smoother journey, you might prefer to put your money in a different sector.
