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Market Close Commentary; 7 May 2020

  • May 07, 2020 05:14 PM AEST
  • Team Kalkine

Summary

  • The Association of UK Airlines has asked the UK government to waive-off the air passenger duty (APD) for 12-months. The APD contributes close to £3.7 billion annually to the government's revenue.
  • The waiver of air passenger duty would help to boost the passenger demand by 1.2 million passengers in August 2020, and it would also increase the number of routes by 5 percent to 6 percent served each month.
  • IAG warned that the business performance in the Q2 FY20 would be worse than Q1 FY20 due to the lack of passenger demand and travel restrictions.
  • IAG reduced the 2020 capex by €1.2 billion to €3.0 billion.
  • Easyjet secured a total funding of approximately £1.9 billion since March 2020 through term loans, revolving credit facilities and sale & leaseback transactions.
  • Easyjet placed new shares to raise £419 million.
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Given the above-market condition, we would discuss two airline stocks - International Consolidated Airlines Group SA (LON: IAG) & Easyjet PLC (LON: EZJ). As on 20 July 2020 (before the market close at 3.04 PM GMT+1), IAG and EZJ were down by 3.52 percent and 3.14 percent, respectively, against the previous day closing. Let's walk through their financial and operational updates to understand the stock better.

International Consolidated Airlines Group SA (LON: IAG) – Expects the passenger demand to recover to 2019 level only by 2023

International Consolidated Airlines Group SA is a UK based international airline carrier. The Group operates through brands, such as British Airways, Aer Lingus, Iberia, Level and Vueling under its portfolio. In 2019, the Group operated 598 fleets on 779 routes to 279 destinations. IAG is included in the FTSE 100 index.

Q1 FY2020 Trading update (ended 31 March 2020) as reported on 7 May 2020

In Q1 FY20, the Group generated total revenue of €4,585 million. The passenger revenue declined by 14.5 percent year on year to €3,953 million due to the lower operating capacity. The operating capacity measured in available seats kilometres (ASK) was down by 10.5 percent year on year. The passenger revenue per ASK declined by 4.5 percent year on year to €5.85 cents in Q1 FY20 from €6.13 cents in Q1 FY19. The Group reported an operating loss of €535 million in Q1 FY20 from an operating profit of €135 million a year ago. The business performance was severely impacted in March 2020 due to the restriction imposed on the travel where most of the loss was incurred in the last two weeks of March. During April and May, the Group slashed the operating costs per week from €440 million under the regular flying programme to €200 million. IAG has reduced the 2020 capex by €1.2 billion to €3.0 billion. In Q1 FY20, the decline in fuel costs led to over-hedging costs. As on 30 April 2020, IAG had liquidity of €10.0 billion. To boost the balance sheet, the Group extended US$1.38 billion through the revolving credit facility of British Airways. On 7 May 2020, the Group announced that Luis Gallego would take over as the Group chief executive officer from 24 September 2020.

Q1 FY2020 Financial Summary

(Source: Company Website)

Share Price Performance Analysis

1-Year Chart as on July-20-2020, before the market close (Source: Refinitiv, Thomson Reuters)

International Consolidated Airlines Group SA's shares were trading at GBX 211.70 (as on 20 July 2020, before the market close at 3.06 PM GMT+1). Stock 52-week High and Low were GBX 684.00 and GBX 159.25, respectively. The Group had a market capitalization of £4.36 billion.

Business Outlook

IAG warned that the business performance in the Q2 FY20 would be worse than Q1 FY20 due to the lack of passenger demand and travel restrictions; the Group expects operating loss before the exceptional item to widen in Q2 FY20. The Group expects the airline business would recover to 2019 level only by 2023. IAG had deferred delivery of aircraft to preserve cash and highlighted the requirement of a necessary Group-wide restructuring to sustain through the pandemic.

Easyjet PLC (LON: EZJ) - Anticipates short-haul recovery would be earlier than the long-haul

Easyjet PLC is a UK based Airline Company mainly operating in Europe. The airline is a low-cost carrier and runs close to 337 fleets including A319, A320 and A321. In 2019, the Company operated on 1,051 routes and at 159 airports across 34 countries. Easyjet is included in FTSE-250.

H1 FY2020 results (ended 31 March 2020) as reported on 24 June 2020

The total passengers carried reduced by 7.4 percent to 38.6 million in H1 FY20 mainly due to the lower number of seats. In H1 FY20, the capacity declined to 42.7 million seats from 46.2 million seats in H1 FY19, due to flight cancellation in March 2020. The total revenue increased to £2,382 million, which was up by 2.2 percent at constant currency due to an increase in revenue per seat. The revenue per seat increased by 10.2 percent at constant currency to £55.60 in H1 FY20 from £50.71 in H1 FY19. In response to Covid-19, the Company took measures to preserve cash. It has deferred deliveries of 24 aircraft after 2025 and increased the short-term flexibility. As on 22 June 2020, the Company had cash of nearly £2.4 billion. The Company negotiated the aircraft agreement with Airbus and revised expenses related to other projects which would result in capex saving of close to £1 billion over three years. The Company expects a gross capex of £400 million in H2 FY20. Easyjet had secured a total funding of £1.7 billion since March 2020. It has drawn £400 million from a revolving credit facility (RCF), issued a commercial paper of £600 million via Covid Corporate Financing Facility (CCFF) scheme of the government, secured term loans of total £400 million and added £301 million through sale and leaseback of assets.

Recent Events

  • On 26 June 2020, the Company performed the sale and leaseback transaction of six A320 neo aircraft for a cash deal of around £206 million. This transaction was part of the target £500-650 million through sales and leaseback transaction. As on 31 March 2020, the six assets sold had a net book value of approximately £141 million.
  • On 25 June 2020, the Company placed 59,541,498 new shares at 703 pence per share. The new stock issued generated gross proceeds of about £419 million.

Key Performance Indicators H1 FY2020

(Source: Company Website)

Share Price Performance Analysis

1-Year Chart as on July-20-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Easyjet PLC's shares were trading at GBX 640.90 (as on 20 July 2020, before the market close at 3.04 PM GMT+1). Stock 52-week High and Low were GBX 1,570.00 and GBX 410.00, respectively. The Group had a market capitalization of £3.03 billion.

Business Outlook

The Company's focus has remained to maximize liquidity since the Covid-19 hit the world. The Company has performed scenario analysis for cash burn considering the flights stay grounded, and it is confident of sustaining through the tough times. The Company has halted the jet hedging from April 2020 to October 2021 due to the pandemic. The safety of the passengers would be the key priority of the Company with daily disinfecting of the operating flights. Easyjet expects the leisure travel would recover before the business travel, and the short-haul recovery would be earlier than the long-haul.

 


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