Tough Time Ahead For EasyJet (EZJ)?

  • Apr 03, 2019 BST
  • Team Kalkine
Tough Time Ahead For EasyJet (EZJ)?

In a trading update brought forward after a review of Brexit preparations, discount carrier EasyJet warned that travellers were putting off booking their summer holidays, weakening demand for tickets and leading to softer prices. The airline blamed uncertainty regarding the future relations between the UK and the EU as the reason behind this decline in demand, as travellers are delaying their plans for fear of how the Brexit process will end. The company said it has become ‘more cautious' on the next six months, prompting a near 10 per cent fall in the airline's shares. 

Amid higher operating costs, the company warned on its outlook for the next six months. According to the trading statement, the management expects a £275 million pre-tax loss in its first half-year to March 31 against loss of £18 million reported in the corresponding period last year. While revenue per seat at constant currency is expected to have declined by about 7.4 per cent, revenue per seat in the second half at constant currency is supposed to be only slightly up, reflecting a weak third quarter. An uptick in the crucial July-September period is expected, though the assumptions are made based on more positive Brexit outlook. Though the company maintained its guidance for its crucial measure of cost per seat excluding fuel, which it said would be flat, it expects costs during the period to have risen by 19 per cent due to a high fuel bill and other measures undertaken to maintain its schedule in case of summer disruption. The grim outlook indicates that the company will struggle to achieve a full-year pre-tax profit of £580 million, the target set out as recently as January.

Johan Lundgren, EasyJet Chief Executive, commented that the softness in European markets is due to "macroeconomic uncertainty" and "unanswered questions" surrounding Brexit, but noted that the company is operationally well prepared for Brexit and further initiatives are being rolled out. He sought solace from the fact that the EU Parliament has passed its air connectivity legislation, which will ensure smooth flow of aircraft across the Dover Strait.

The CEO reported that a decline in bookings for flights to and from the United Kingdom could be seen, though domestic travellers were still booking, reflecting a decline in economic prospects across Europe. Chief financial officer Andrew Findlay noted that unstable Euro was also leading to a decrease in bookings. Mr Lundgren hoped that clarity on Brexit would reduce hesitation amongst travellers.

The airline had previously been among the more bullish voices in the sector; on November 2018, the CEO had said that the uncertainty about Brexit negotiations was not hurting sales and the carrier was well-prepared for no-deal Brexit. Bookings had not seen any decrease, and those for the summer of 2019 were slightly ahead of the previous year. Despite turbulence in the broader industry, the company had lifted its full-year payout by 43 per cent, signalling its confidence in its future performance.

EasyJet, which declined by 9.7 per cent to GBX 1,009 on Monday also dragged down its rivals with it. Ryanair dropped by 4.7 per cent, and British Airways owner IAG fell by 1.6 per cent. European low-cost airlines are buffeted by a myriad of structural and economic issues: higher fuel costs, economic jitters across the region and declining seat prices as capacity expands. In 2018, some smaller European airlines were pushed towards bankruptcy while a regional carrier put itself up for sale. Other airlines had been warning of weaker demand as well; Ryanair in February had reaffirmed its profit warnings and warned that summer fares would rise in 2019.

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