EasyJet s chance to find firmer ground

Airline shares remain notable laggards among European stocks, even as economic data continue to show few ill effects from the Brexit vote.

Low-cost carrier easyJet is this week’s case in point ahead of a trading update on Thursday.

Reuters’ index for the region’s carriers is 30% lower this year, but like other underperforming industries, airlines trace long-standing pressures further back than 23rd June.

Paradoxically, low fuel prices, which on the surface ought to have provided a tailwind, have brought more turbulence.

There’s been a jump in capacity growth on European routes, putting market expansion at a 10-year high, according to recent Deutsche Bank research.

The bank expects seat capacity to grow around 8% between September and March 2017.

Make that over-capacity.

Airlines have become more bullish about passenger growth, as travellers become more cautious, after high-profile terrorism attacks and other disasters, exacerbated by air traffic controller strikes in France.

Ticket prices have come under pressure.

British-based carriers, with the most sizeable revenues in sterling have a further challenge as the pound has churned close to 30-year lows since late-June.

Europe’s second-largest carrier is also the largest European airline without an administrative base within the single-currency area, and investor concerns that it may lose its EU safety certification coverage have combined with worries that Europeans won’t make as many EU-UK trips.

Consequently, among Europe’s airline stocks, easyJet’s 42% slide makes it the worst performer this year.

Source: Thomson Reuters Eikon

In July, the group’s CEO Carolyn McCall said conditions were the toughest she’d experienced since taking the helm six years ago, with weak sales and sliding passenger yields forcing the group to scrap profit forecasts.

Market forecasts have duly declined. Last November, the market was expecting pre-tax profits as high as £746m, according to Thomson Reuters data. Forecasts of underlying profits for the year to end-September have now come down to £519m.

But are they still too high?

Robust airfares shown in UK August inflation data contrast with recently reduced passenger forecasts by airline food providers like Elior Group and SSP Group.

Understandably, easyJet is under pressure to reinstate guidance.

Its first chance to do so will be Thursday’s pre-close trading update, ahead of final earnings on 15th November.

A continued lack of guidance could push the shares back down to the 3-year lows seen in July. Endorsement of slashed consensus wouldn’t be great. But absent a severe deterioration in the outlook, clarity could set a floor for the stock over the medium term.