Why EasyJet is the most promising airline company to invest in the COVID-19 period?
Updated: Sep 6, 2020
COVID-19 has had a significant impact on the economy and in particular on the airline industry. To stamp out the spread of the pandemic, governments were forced to take severe measures. As a first step, they imposed containment measures on their citizens returning from at-risk foreign destinations. As a second step, some governments were even forced to close their borders, causing air traffic to collapse by more than 90% between 30 March and 15 June.
For EasyJet (EJZ), the impact of this reduction in traffic has resulted in a £754 million loss, which has led it to drastically reduce its loan operating costs by 80%. These measures resulted in the dismissal of nearly a third of its employees and also the closure of 3 of its bases: Stansted, Southend and Newcastle. (Yahoo Finance, 2020). Following the reduction in its costs, Johan Lundgren, EasyJet's CEO, commented these measures as ‘’decisive and should enable it to meet the challenges of the pandemic’’ (BBC News, 2020).
Since 15 June, EasyJet has benefited greatly from the reopening of the Schengen area and intra-European tourism representing the majority of its flights. For example, 147 routes were reopened in July and 210 in August, representing a 43% increase in the number of routes. Since this resumption, its load factor has been close to 84%. Thus, the increase in traffic accompanied by the rise in the load factor suggests a significant drop in losses for the third and fourth quarters of 2020.
Since the start of the pandemic, EasyJet has raised 2.4 billion pounds. Indeed, it has successfully borrowed: £400m represented by short-term bank loans, £600m represented by UK government loans, and £400m long-term loans. In addition, it was also able to generate: £419 million from a capital increase, and £608 million from aircraft leasing and sales. This capital increase has enabled and will enable the company to generate sufficient cash flow to meet its obligations. Other airlines such as Flybe and Virgin have been unable to benefit from government aid and have had to initiate bankruptcy proceedings.
EZJ's share has always been one of the most sought-after shares in the aviation sector, as its P/E ratio showed before the crisis (10.35 compared with 8.99 for the sector). In addition, it has always had a value yield status since it offered a higher dividend yield than companies in its sector (7.71 vs. 6 for the airline industry). Moreover, in the last 5 months, its share price has been divided by 3. In February, it was valued at £1,508, compared to the beginning of August when it was valued at £507.2. We can thus underline that the value of its share has increased by 60% from August 2nd to August 11th. In addition, we can highlight a downward triangle in the month between July and August (Figure 1). This is illustrated by two minimum values reached on the 22 June and on the 27th of July, and by two maximum values reached on the 1st of June and on the 13th of July. From the third of August, we can observe a sluggish trend halting this downward trend. Moreover, its positive beta of 1.56 amplified this upward movement (FTSE100).
Source: Yahoo Finance
The day EZJ recovers normal activity, approximately between 2022 and 2023, it will be able: to resume its dividend distribution policy which has so far been higher than that of its predecessors; to regain its status as a yield value; and to justify a P/E ratio that is also higher than that of the sector (10.35 versus 8.99). Finally, we can see that although its margins have been cut and it has gone into debt, it is still a solvent company. Indeed, its Quick ratio (Current Assets/ Current Liabilities) is estimated at 0.55, which means that it is still able to finance its liabilities. Investing in EasyJet means betting on the pandemic being resolved. But unfortunately, as of today no one can certify how long it will take to achieve this.
Above all, it is to be hoped that the opening up of air transport within the Schengen area will not be called into question. As a result, this investment is undeniably risky and should not constitute a significant part of the investor's portfolio. A range of around 5% should not be exceeded given the level of risk that the company presents today.
By Rafael David - BSc Management with Finance
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