Avoid easyJet shares – there are better airlines to invest in
EasyJet used to be one of Europe’s most impressive airlines. But now it is facing challenges on all fronts and losing out to the competition. Rupert Hargreaves explains why you shouldn’t buy easyJet shares.
The global travel industry just can’t seem to catch a break. Just as it was hoping for better times as Covid-era lockdowns end, the sector now faces rising fuel costs and consumers who are rapidly having any disposable income eaten away by surging living costs.
You just need to look at the easyJet (LSE: EZJ) share price to get a sense of the sector’s health.
The stock plunged by 70% to around 400p in the depths of the pandemic before recovering to just over 920p in the first half of 2021. But as uncertainty has returned, the shares have fallen back to 424p.
EasyJet is facing challenges on all fronts
EasyJet used to be one of Europe’s most impressive airlines; it took the market by storm in the mid-90s with its colourful branding, cheap fees and streamlined business model.
However, over the past 27 years the business model has been copied, competition has grown and infighting with founder, Stelios Haji-Ioannou, has distracted management.
The company has arguably taken its eye off the ball. New rivals, which include Wizz Air (LSE: WIZZ), have better fleets and stronger balance sheets. Others such as Jet2 (LSE:JET2) – best-known for its package holiday business – have doubled down on their package holiday offerings in order to stand out in a competitive market.
Then there’s Ryanair with its low-fare, no-frills offering. The firm used to be easyJet’s closest competitor, but has pulled ahead by keeping costs low. Consumers keep coming back, despite a poor customer service record.
Unfortunately, many of easyJet’s problems are of its own making. When the pandemic struck it laid off thousands of workers to control costs, and dragged its feet on customer refunds.
While other airlines also let huge numbers of staff go, easyJet has been struggling to entice workers back to meet the summer rush. To help, the company has started offering cash bonuses, although it remains to be seen whether this will produce the desired effect.
In the meantime, easyJet is struggling to meet demand, and has one of the worst records for cancellations so far this summer. In the week to 3 June, easyJet was the operator of 46% of the 356 cancelled passenger flights departing from UK airports.
Jet2 by contrast, acted quickly to refund customers in the pandemic and its efforts have paid off; it has been rated one the best airlines “by a mile” by travel experts as it has been able to stick to its travel schedules.
Now, a high customer satisfaction rating is not necessarily essential for airlines. As Ryanair has shown, customers don’t care if the price is right.
Nevertheless, when there is no difference between service ratings, consumers do care about price. And when it comes to pricing, easyJet is the most expensive of the three budget carriers outlined above. EasyJet’s average revenue per seat kilometre is between 14% and 54% more than Ryanair and Wizz.
That does not mean the company is more expensive for every single customer, but it is a strong indication that easyJet costs more for the same service. In a competitive market, that’s not a good look.
The outlook will determine the future of the easyJet share price
Over the six months to the end of March, easyJet’s reported loss before tax was £557m. Airlines usually lose money over the winter period and recoup these over the summer, although this year the group has been struggling to ramp up capacity over the summer.
Due to the well-publicised disruption at some of Europe’s largest aviation hubs, easyJet is now “consolidating a number of flights across affected airports.” Due to these actions, the group is expecting capacity in the third quarter of its current fiscal year to be around 87% of 2019 levels, compared to earlier expectations of 90%.
Still, there is a silver lining in all of this. By consolidating flights management now expects costs (excluding fuel) to come in lower than expected earlier this year.
What’s more, easyJet is seeing higher sales of ancillary services, such as baggage add-ons and sandwiches. These can be far more lucrative than ticket sales and, as such, are a valuable source of revenue for the firm. A couple of weeks ago the airline reported that these revenues had risen to £15.12 per seat, around 44% higher than the same period in 2021.
Looking ahead, the company has sold around 48% of capacity for the fourth quarter already with yields up 14%. That’s a positive development considering the pressures on consumers around the world.
The elephant in the room is higher fuel prices could eat into margins. Heading into the second half the group has only hedged 71% of consumption at prices around 50% below the current market rate. That suggests easyJet will have to pay 100% to purchase the fuel it’s going to need for the rest of the year.
However, with headwinds growing, personally, I’d stay away from the airline as it enters a patch of turbulence. My favoured stock in the sector is Jet2, followed closely by Wizz Air.