Summer of Discontent for easyJet

Madhu Unnikrishnan

June 28th, 2020 at 12:52 PM EDT

  • Europe’s easyJet reported financial results for its winter half, which ran from October 2019 to March 2020. Only in the final month of the 12-month period did it begin to feel the impact of Covid 19, at first in northern Italy, then Spain, then in a broader swath of markets. Only on March 30 did it ground its entire fleet, leaving the most damaging financial effects of the pandemic to the current April-to-September half.

    The winter half, in fact, was on balance a good-news story for easyJet. Rival Thomas Cook disappeared last fall, MAX and NEO shortages lifted yields throughout Europe, and even with the typical offpeak winter lull — and the virus impact late in the half — easyJet recorded a perfectly acceptable negative 7% October-to-March operating margin. If that sounds bad, consider that operating margin for the same period a year earlier was negative 11%. That was followed by a positive 18% performance last summer.

    It’s the way things have always worked at easyJet: Modest losses in the winter half, followed by strong profits in the summer half. It’s the way they worked in the past anyway. This summer half, of course, is an altogether different situation. With its planes idled, easyJet produced essentially nothing from its March 30 grounding date until June 15, when it resumed operations to a limited number of domestic routes within the U.K., France, and Italy. National borders within the E.U. are now opening to tourists, and easyJet expects to operate about 30% of its normal capacity for the July-to-September quarter, which includes the super-peak months of July and August. In terms of aircraft returning to the skies, easyJet should have 85 flying next month, 155 in August, and 147 in September.

    Its total fleet before the crisis was 337 planes, all A320-family, and more than two-thirds of them owned rather than leased. It recently deferred 24 of the 114 NEOs it has on firm order (most of its orders are A320 NEOs, with some A321 NEOs in the mix). It beat back an attempt by founder and key shareholder Stelios Haji-Ioannou to cancel orders. Importantly, it retains flexibility to operate as many as 327 planes by 2023, if demand returns faster than anticipated, or as few as 272 in a worst-case scenario. It’s currently planning on 302, based on IATA’s expectation of taking about three years for getting back to 2019 traffic levels.

    Fortunately, liquidity isn’t a major worry, with easyJet initiating another round of fundraising just last week — this time it’s selling as much as $500m worth of stock, alongside additional aircraft sale-leaseback deals. Other than availing itself of a government-backed lending program for British companies, it hasn’t received any material government aid. Most importantly, Europeans are starting to take to the skies again, amid declining infection rates continent-wide. Booking and even pricing trends for what’s left of this summer have been “encouraging,” easyJet says, albeit from an extremely depressed base. Booking trends for the upcoming winter are well ahead of the equivalent point last year, boosted by customers rebooking spring trips that were cancelled because of the outbreak. In fact, an estimated 65% of customers with cancelled trips will have rebooked, rather than request a refund. And that’s important for cash preservation.

    Early indications for summer 2021 demand, meanwhile, also look encouraging. Note however, that when easyJet speaks of positive booking trends, it’s talking mostly about demand from outside the U.K. Demand from the U.K. remains subdued, surely because of the government’s imposition of a mandatory 14-day quarantine on anyone entering the country (Ireland and Norway are others with a similar policy). Such travel restrictions though, whether quarantines or less draconian measures, will surely ease before long, given Europe’s heavy economic dependence on tourism. It’s the intercontinental travel restrictions that will likely take much longer to disappear, but which have no relevance to easyJet (other than people who arrive from overseas on other airlines and then travel within Europe).

    To be clear, nobody expects demand to return to pre-crisis levels anytime soon. Also, revenues will be pressured by relaxed ticketing rules designed to encourage wary travelers. easyJet for example currently offers customers the right to switch their flights up to 14 days before departure without a change fee. The critical key to financial recovery, therefore, is cost cutting. Cheaper fuel makes that much easier, though easyJet does have lingering wrong-way hedges on its books. As it happens, Brent crude prices have quietly inched their way back to around $40 per barrel, double their low point in mid-April. But still, it beats last year’s average of $64.

    Fuel aside, easyJet is more uncomfortably planning to axe as much as 30% of its pre-crisis workforce. As of April, many of its workers have been on temporary furlough. The airline will, however, bring some outsourced maintenance workers in-house to save money. It’s negotiating for better airport deals. It might close or downsize some of its less profitable bases. Overall, it aims to hold fiscal year 2021’s non-fuel cost per seat flat relative to fiscal year 2019 (in other words, 12 months ending Sept. 2021 versus 12 months that ended Sept. 2019). That’s a “stretch goal” though, given the reverse economies of scale inherent with so much shrinking.

    What else is easyJet doing to secure its future in the post-pandemic world? For one, it’s rebuilding revenue management algorithms, based not on now-irrelevant historical booking patterns but on indicators like flight search volumes, web traffic, and forward bookings. It’s adding new holiday markets like Egypt as it seeks to build its new packaged tour business with hotel partners. It thinks low-cost carriers like itself will benefit from tough economic times, causing consumers and businesses to seek value.

    It hasn’t lost any of its zeal for cutting carbon emissions. It’s naturally watching closely as markets like London Gatwick, easyJet’s busiest airport, undergo extreme competitive shakeups. Many rivals, to put it more succinctly, are cutting and shrinking. easyJet, meanwhile, remains an investment grade airline despite recent downgrades by ratings agencies.
  • Elsewhere in Europe, Greece’s Aegean unveiled a gory set of first quarter results, headlined by a negative 48% operating margin. The airline always loses money in Q1, so the red ink is no surprise. But after positive trends in January and February, the Covid crisis caused a 57% y/y revenue decline in March, hence the hair-raising results. Aegean offers limited detail with its Q1 earnings release, conducting accompanying investor discussions only after half-year and full-year results. In any case, Greece is faring relatively well in terms of Covid cases and stands to benefit economically as an early opener to tourists from elsewhere in Europe. It hopes to establish a travel reopening agreement with the key U.K. market soon.

    For the record, Aegean’s Q1 revenue dropped 15% y/y on 8% less ASK capacity, but operating costs still increased 1%. Fuel costs rose 6%, burdened like many other carriers by bad hedges. Remember: Aegean doesn’t operate any longhaul intercontinental flights, relying instead on inbound tourist traffic from the rest of Europe, and to a lesser extent the Middle East. The recovery in such shorthaul leisure markets is already underway.  

Madhu Unnikrishnan

June 28th, 2020 at 12:52 PM EDT