EasyJet shallow but steady climb

Hello to Berlin

EasyJet shares rose as much as 3.2% on Tuesday as discussions over the purchase of some insolvent Air Berlin assets reportedly gathered pace.

Investors have been steadily uprating the stock this year as the impact of Europe’s persisting seat price war has been pretty much accounted for whilst the group’s improved efficiency, cost and scale strategy have kept it on track to meet full-year expectations. In July, easyJet upped its headline pre-tax profit guidance for 2017 to a range of £380m-£420m. That points to a fall of at least £75m relative to the year before. But the group’s improved expectations were still less pessimistic than the market. Even a caution that “inefficient capacity in the European short-haul market…continues to drive lower fares” was interpreted as a net positive for the group. Now, with signs that smaller more vulnerable carriers are beginning to fatigue and, like Air Berlin, even fail; risks for larger, better financially structured airlines like easyJet are seen more to the upside.  If easyJet succeeds in buying some Air Berlin assets—it has bid for 27-30 planes according to reports—we think its shares could maintain momentum both as a recovery play and on speculation that profit could exceed guidance.

Lufthansa and Air France soar

However the two best-performing large European airline stocks this year are Lufthansa and Air France-KLM, with shares around 90% and 150% respectively. The leaner, better-positioned flag carriers are getting the best picks of distressed consolidation deals in the background whilst Air France launched a low-cost Boost unit in July, and a new long-haul service called Joon this week. These initiatives have encouraged AF-KLM to offer a more optimistic take on the impact of discounting as revenues rebounded in its second quarter and it now expects further growth throughout the second half. Things are looking up for Lufthansa too. It is expected to take control of its beleaguered Berlin-based rival, including two subsidiaries, one in Austria. It has confidently—perhaps prematurely— announced that it will need 3,000 new employees to fully fill the gap left by Air Berlin. Revenues at both European giants have also enjoyed beneficial currency effects to both the dollar and the pound.

Ryanair

And we can’t forget or discount Ryanair. EasyJet stock has outperformed that of its arch rival this year by a few percentage points amid the Dublin-based group’s recent clumsy missteps over scheduling and a warning in the summer that prices could yet weaken further. However, there are few carriers better-placed than Ryanair to weather the storm than Ryanair. It is the best cash-resourced low-cost airline on the (European) bloc and is expected to generate an additional c. £300m in free cash flow this year. EasyJet will almost certainly end another year with a negative cash balance.

True, easyJet is demonstrating that it too can weather the storm, and its shares are rising to reflect that. Even as visibility on the outlook improves though, the biggest certainty remains fierce competition, likely limiting growth and share price upside into the year end.