Two FTSE 100 Travel & Leisure Stocks Surging with Lockdown Easing – IAG and EZJ

Two FTSE 100 Travel & Leisure Stocks Surging with Lockdown Easing – IAG and EZJ

“Human felicity is produced not as much by great pieces of good fortune that seldom happen as by little advantages that occur every day” – Benjamin Franklin

The British and the European markets extended gains on Wednesday (before the close on 3rd June 2020) while the pan-European STOXX 600 was hovering near 3-months high. Some of the significant drivers of market movements were as follows:

  • China’s service sector revived to growth in May, bolstered hopes of a speedy recovery from the pandemic-driven economic slump.
  • The prices of shops in Britain fell by 2.4 per cent in annual terms.
  • As per the IHS Markit, the British economy is still shrinking but at a decreasing rate as Purchasing Managers' Index jumped to 30 in May from 13.8 in April.

As the economies are set to revive with lockdown easing, the airline stocks are surging on optimism of regaining travel demand, albeit the challenges remain, and the industry has a long way to register equivalent trading to the pre-crisis scenario. Therefore, it would be interesting to study, how are travel and leisure stocks responding in the market. On this note, we will discuss - International Consolidated Airlines Group SA (LON: IAG) and Easyjet PLC (LON: EZJ) today. As on 3rd June 2020 (before the market close at 1.50 PM GMT+1), IAG gained around 8.8 per cent, while EZJ soared over 6.2 per cent. For better understanding regarding the share price movement, lets quickly go through their respective financial and operational position to gauge upon the plausible outlook scenario.

International Consolidated Airlines Group SA (LON: IAG) – Decent Liquidity Profile to Combat Short-term Demand Slump. 

International Consolidated Airlines Group SA is an international Airline Company. It operates with more than 598 aircraft and caters to 279 destinations, while serving nearly 118 million passengers annually. Its portfolio consists of The British Airways Iberia, Level, Aer Lingus, and The Vueling. The Company’s stock has been listed on the London Stock Exchange since 24th January 2011, and currently, it is trading as a constituent of FTSE 100 index.

Segment Structure

  • Geographically, the Group bifurcates its revenue into the following regions - the United Kingdom, USA, Spain, and Rest of World.
  • The business operations are distinguished into Cargo, Passenger and Other revenue. In FY2019, passenger revenue contributed around 88 per cent of the total revenue.

(Source: Annual Report, Company Website)

Progress of Non-Financial Key Performing Indicators in 2019

  • Net Promoter Score (NPS) surged by 9.5 points in FY2019 against FY2018, reflecting better enhancement in customer sentiments.
  • The Company increased capacity by 1.7 per cent and 1.4 per cent in Europe and North America, respectively.

(Source: Annual Report, Company Website)

Key Developments – Change in Top-Level Management

  • 7th May 2020: The Board of IAG appointed Luis Gallego as new chief executive officer (CEO), effective from 24th September 2020 since the current CEO, Willie Walsh will retire from his position.
  • 1st May 2020: A syndicated financing agreement of EUR 750 million and EUR 260 million were signed for Iberia and Vueling Airlines, respectively.
  • 2nd April 2020: The Group reported to adopt the COVID-19 Job Retention Scheme as the business decided to reduce the capacity by 75 per cent in April and May.

Financial Highlight – Sinks to Quarterly Loss, Impacted by the Outbreak of COVID-19

On 7th May 2020, the Company provided the Q1 Update for the Three Months to March 31, 2020. Overall results reflected the devastating impact on the travel sectors and global airline (due to COVID-19), with the spread of the virus worldwide, resulting in lockdowns and travel restrictions, particularly from the end of February 2020 onwards. Some Additional Highlights are stated below:

  • Passenger capacity had been abridged by 94 per cent from late March 2020.
  • Major highlights to focus in Q1: operating loss before exceptional items surged to EUR 535 million (2019: operating profit of EUR 135 million), capacity operated decreased by 10.5 per cent, loss after tax before exceptional items was EUR 556 million, and the exceptional charge stood at EUR 1,325 million.
  • Despite the unprecedented crisis, the Group witnessed a robust balance sheet and liquidity, with EUR 9.5 billion of undrawn facilities at 31st March 2020 and cash of EUR 6,945 million (up EUR 262 million) at March 31, 2020. Whilst the undrawn facilities surged to EUR 10 billion by the end of April.
  • The Company has also taken several effective actions to increase liquidity such as extending British Airways’ RCF (Revolving Credit Facility) and accessing Spain’s Instituto de Crédito Oficial (‘ICO’) facility and the UK’s Coronavirus Corporate Finance Facility (CCFF).

Share Price Performance Analysis

 Source: Refinitiv, Thomson Reuters) - Daily Chart as of June 3rd, 2020, before the market close

IAG’s shares were trading at GBX 269.60 on 3rd June 2020 (before the market close at 2:25 PM GMT+1). Stock's 52 weeks High is GBX 684.00 and Low is GBX 159.25. Total outstanding M-Cap. (market capitalization) stood at approximately GBP 4.95 billion.

Outlook

For April 2020 and May 2020, the normal run-rate cash operating costs have been abridged to EUR 200 million per week from EUR 440 million per week. Capital spending has been reduced by EUR 1.2 billion. The Company said it is planning for a meaningful return to service in July 2020, but these scenarios are extremely uncertain and subject to the travel restrictions and easing of lockdowns. While the Group also believes that passenger demand may only return to pre-pandemic levels in 2023. IAG anticipates that its upcoming quarter (Q2 FY20) will be lower than the current quarter (Q1 FY20). IAG is taking initiatives to enhance its cash flows and diminish operating costs.

EasyJet PLC (LON: EZJ) – Expecting to Fly Around 30 Per cent from 15th June 2020.

EasyJet PLC is a low-cost European Airline Company. It operates through four geographic segments, namely the United Kingdom, Northern Europe, Southern Europe and others. The Company employs around 15,000 people to serve approximately 96 million customers. It has a fleet size of 331 aircraft which caters to 159 airports. It was listed on the London Stock Exchange since 22nd November 2000, and currently, it is trading as a constituent of FTSE 100 index.

(Source: Company Website)

Significant Recent Actions to Combat the Crisis of Coronavirus

  • 28th May 2020: The Group reported to resume domestic flying in the UK and France from 15th June 2020. It will fly around 30 per cent of capacity compared to what was flown in the fourth quarter of 2019.
  • 26th May 2020: Andrew Findlay decided to leave the Company as the Chief Financial Officer.
  • 6th April 2020: The Group raised GBP 600 million through the Covid Corporate Financing Facility. Further, it decided to withdraw USD 500 million through the revolving credit facility. Following the transactions, the Company held £2.3 billion in cash reserved.

Financial Highlights – Expect Demand to Build Slowly

The Company provided the trading Update for the six months ending 31st March 2020 and updates the market on capacity, fleet and cost structure plans. Both the updates reflected that the Group had signed two term loans totalling approximately GBP 400 million (both loans maturing in 2022), issued GBP 600 million of Commercial Paper (through the Covid Corporate Financing Facility (CCFF)), USD 500 million RCF, and decent H1 trading performance (with total revenue surged 1.6 per cent to £GBP 2,382 million). Additional H1 Highlights are:

  • The revenue is also reflecting the impact of Flights cancelled in March due to Coronavirus.
  • EZJ has been decisive in meeting the challenges of COVID-19 by securing GBP 2 billion of additional funding, for ensuring that the Company can ride out a prolonged grounding by driving down costs and delivering vastly abridged capex while retaining fleet flexibility.
  • The total headline cost is expected to decrease by 1.6 per cent in the first half of 2020, driven by reductions in variable expenses such as airport and fuel charges.
  • Led by significantly lower seat capacity, flights being cancelled and substantial increases in disruption costs, the impact of COVID-19 drove an additional pressure of 4.5 per cent in costs.

Share Price Performance Analysis

Source: Refinitiv, Thomson Reuters) - Daily Chart as of June 3rd, 2020, before the market close

EZJ’s shares were trading at GBX 764.50 on 3rd June 2020 (before the market close at 2:32 PM GMT+1). Stock's 52 weeks High is GBX 1,570.00 and Low is GBX 410.00. Total outstanding M-Cap. (market capitalization) stood at approximately GBP 2.87 billion.

Outlook

For the first half, the headline loss before tax is anticipated between GBP 185 million and GBP 205 million, while its reported loss before tax is expected to be in between GBP 360 million and GBP 380 million in the first half (including the impact between £175 million and 185 million in relation to the over-hedging of FX and fuel). The gross capex anticipations are for approximately GBP 900 million in 2020, around GBP 600 million in 2021 and approximately GBP 1,000 million in 2022. For its long-term scenario, the Company is in a decent position to resume flying from 15th June 2020 and stay focused on doing what is right for the EZJ’s health. Meanwhile, the Group continue to take effective actions to reduce cost, enhance liquidity, conserve cash burn, protect the business and ensure it is positioned well on the return to flying. 

 

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