easyJet shares come into focus ahead of full-year update

• easyJet is to provide an update on what to expect from its annual results that will be released in November
• Low-cost airline is expected to post steep losses after one of the worst years for the airline industry on record
• Airline is committed to ‘profitable flying’ but is currently burning through cash resources, prompting fears it will need more cash despite having raised over £2.2 billion in extra liquidity during the pandemic
• easyJet shares are down 64% year-to-date, underperforming rivals like Ryanair and Wizz Air, which are both trailing by just 17.5%
• The steep fall and its low-cost short-haul model has prompted brokers to place a Buy rating on easyJet, with a target price of £7,19 implying up to 32% upside from the current share price

easyJet to provide update on full-year performance

easyJet will release a pre-close trading statement on Thursday 8 October. This will provide an update on what to expect for the full year (FY) to the end of August 2020, ahead of annual results being released on Tuesday 17 November.

Grounding of flights had dramatic impact on easyJet

To say it has been a tough year would be understatement. The airline industry has been among the worst hit by the coronavirus pandemic this year, which has derailed the peak holiday and travel season.

easyJet grounded its entire fleet on 30 March and although flights restarted on 15 June, demand has remained well below traditional levels thanks to lockdowns and the ever-changing travel restrictions being imposed by countries around the world.

The grounding of all flights has been dramatic and meant easyJet only operated flights during the final weeks of the third quarter (Q3). This meant just 10 aircraft completed 709 flights carrying 117,000 people in the quarter. The year before, in more ordinary times, easyJet completed over 165,000 flights using 315 aircraft – and carried a staggering 28 million people.

This meant easyJet reported just £7 million in revenue in the most recent quarter, and posted a headline loss before tax £324.5 million. That loss built on the figure from H1 of £193 million, resulting in a loss for the first nine months of the financial year of £517.5 million.

The timing of the pandemic has compounded problems for the airlines. The third and fourth quarters, during the summer months, is when easyJet usually makes its profit for the year and makes up for losses it usually makes in H1 during the tough winter months.

Can anything be salvaged by easyJet this year?

Things have improved since flights restarted. easyJet said it would operate at 40% normal capacity in Q4, higher than the initial plan to run at just 30%, after being encouraged by bookings. It said it flew 2 million passengers in July alone – 11 times more than what it flew in the whole of Q3, adding that numbers would rise further to peak in August.

Still, it won’t be enough to salvage anything this year. The airline still expects to book a loss in the final quarter but said this won’t be as hefty as the one reported in Q3.

What to expect from easyJet’s update

Traditionally, easyJet’s pre-close updates gives investors a brief summary of its performance, including its key performance indicators (KPIs) like passenger numbers, load factor, and the revenue and cost of each seat flown.

More importantly, the airline usually reveals what range its headline profit – or in this case, loss – before tax will be for the FY. A Reuters-compiled consensus is expecting easyJet to report a loss of around £793.9 million, swinging from a £427 million profit the year before.

What is the outlook for easyJet and the airline industry?

Although the airline industry is eager, there are no signs that things will return to normal anytime soon. Impractical travel restrictions have meant it may be safe to go somewhere one day but not the next, and the threat of having to quarantine upon their return dents consumer appetite to fly further.

This is a bigger problem for European airlines. Europe traditionally operates like one giant domestic market – much like in large countries such as the US and China – but the coronavirus pandemic has disrupted this.

HSBC recently warned that the intra-EU market was not recovering in the same way as other major markets because European nations are imposing restrictions on one another. HSBC expects the situation to remain dire for all airlines but says low-cost carriers such as easyJet and Ryanair are expected to be the most resilient, adding they are best-placed to capitalise and gain market share if competitors fail.

Notably, easyJet has stressed it is committed to ‘profitable flying’ and only operating flights that can make money, whilst stating it will pounce on any opportunities that arise from troubled rivals – such as buying new airline slots. One of easyJet’s primary selling points is that it serves primary airports and it will be keen to build upon this if the opportunity arises.

EasyJet is cutting costs but still burning through cash

Still, easyJet is in a precarious position. It is attempting to counter the drop-in demand by cutting costs but, even after taking dramatic action, it looks like more needs to be done. It said it burnt through £774 million of cash in Q3 alone – almost twice as much as its entire annual profit last year. That was well below the £1 billion quarterly cash burn that it originally expected, but shows the airline is still bleeding money.

The Luton-based airline has already launched a major cost restructuring programme and aiming to reduce costs further. It has cut thousands of jobs, raised billions in loans and equity, and generating hundreds of millions by selling aircraft and leasing them back.

All in all, it has raised over £2.2 billion during the pandemic, comprising a £400 million extension to its credit facility, £400 million from two new bank loans, £600 million from the UK government, £419 million through an equity placing and another £405 million from sale-and-leaseback transactions. It expects to generate another £95 million to £245 million through more sale-and-leaseback transactions going forward.

Will easyJet need to raise more money?

This means easyJet had £2.56 billion in cash and £3.4 billion of debt at the end of June, resulting in net debt of £835 million. That will leave many investors worried considering how much cash it is burning through right now.

Unless easyJet can make a serious dent in its cash burn then, based on Q3, it only has enough cash to see it through to the end of March 2021. This not only highlights the need to get back to normal as quickly as possible, but also shows that easyJet is likely to need significantly more cash sooner rather than later, especially to survive the tough winter season.

The airline is constrained in its ability to recover by lockdown and travel restrictions and is therefore sensibly trying to rebase itself to survive so it can bounce back in the coming years once things start returning to normal. However, with the airline burning through cash it will take some dramatic and creative thinking to ensure easyJet survives.

The fact that easyJet recently appointed a new chief financial officer, poaching rival TUI's aviation boss Kenton Jarvis last month, provides an opportunity to bring fresh eyes to the situation and build on the drastic action taken by easyJet so far.