Easyjet Share Blog – Interim Results Year Ending 2019

Easyjet has now released their interim results for the year ending 2019.

Revenues increased when compared to the first half of last year due to a £95M growth in passenger revenue and a £65M increase in ancillary revenue.  Fuel costs were up £141M, airport and ground handling costs increased by £103M, crew costs were up £67M and navigation costs grew by £9M, although other costs were down £25M to give an EBITDA £136M lower than last time.  Aircraft dry leasing was down £71M but depreciation was up £133M which meant the operating loss increased by £199M.  Finance expenses increased by a net £5M and tax income increased by £40M to give a loss of £218M for the period, an increase of £164M year on year.

When compared to the end of last year, total assets increased by £431M, driven by a £718M growth in property, plant and equipment, partially offset by a £154M decline in cash, a £198M decrease in derivative financial assets linked to losses on fuel contracts and a £71M fall in receivables.  Total liabilities also increased during the period as a £129M decline in deferred tax and a £119M decrease in borrowings was more than offset by an £849M increase in unearned revenue due to the timing of Easter and accountancy changes, and a £623M growth in lease liabilities following the change in accounting for leases.  The end result was a net tangible asset level of £1.965BN, a decline of £722M over the past six months.

Before movements in working capital, cash profits decreased by £207M to £681M.  There was a neutral working capital position and tax payments decreased by £20M to give a net cash from operations of £571M, a decline of £193M year on year.  The group spent £452M on fixed assets and £13M on intangible assets to give a free cash flow of £106M.  They then repaid leases to the value of £85M and spent £233M on dividends.  There was a £66M net increase in money market deposits but £121M made from the sale and leaseback of aircraft which meant there was a cash outflow of £155M for the period and a cash level of £871M at the period-end.

The adoption of IFRS 16 has changed a lot of the accounting for leases.  There has been a £497M adjustment to right of use assets as well as £73M of reclassification of finance leases.  Debt has decreased by £119M due to the reclassification of finance leases to lease liabilities and the balance sheet includes a £531M adjustment for lease liabilities with £43M of additions as a result of sale and leasebacks. 

Passenger numbers increased by 13%. Capacity increased by 14.5%, mainly due to annualising of new operations in Berlin but the existing network capacity also grew by around 7%.  The load factor decreased by 1 percentage point to 90.1% mainly as a result of building loads in Berlin in Q1. 

Revenue increased by 7.3% as a result of this capacity growth and a forex benefit, although this was partially offset by the move of Easter into H2, the new accounting standard and the annualisation of prior year benefits such as Monarch’s bankruptcy and Ryanair cancelling a large proportion of their winter schedule. 

Total revenue per seat decreased by 6.3% to £50.71.  Headline cost per seat increased by 3.9% to £56.66 as a result of fuel price increases, forex impacts, underlying cost inflation, the move of Easter into H2 (£45M), investing in resilience and the £5M impact of drones at Gatwick.  Excluding fuel, headline cost per seat increased by 1.3%.  The group have hedged their fuel requirements for 72% at $579 per tonne and 58% of 2020 requirements at $660 per tonne.  During the period the average market fuel price increased by 5% to $650 although the hedging in place meant that effective fuel price movement saw an increase of 25% to £493 per tonne. 

The group have started a number of initiatives to drive yield and ancillary revenue, supported in particular by increasing availability and deployment of data and by new product development.  Investment in these has been prioritised and is now expected to support trading in Q4 as well as in the future. 

The group has made good progress in setting up its holidays business and expects to launch the offering by the end of the year, selling holidays for the summer 2020 season.  They have also made further gains with business passengers, flying 1.1M more than last year, up 15.7%.  This has been driven by the expansion at Tegel.

The on time performance was down 1 percentage point to 81% which reflects the challenges of operating with scale in congested airspace.  Performance was significantly affected by the impact of drones at Gatwick but there was a 54% reduction in cancellations in the period.

As usual there are a number of non-underlying items.  The sale and leaseback of the group’s oldest A319 aircraft resulted in a gain on disposal of the assets of £2M.  They incurred £4M in Brexit-related costs, principally due to the cost of transferring pilot licenses to Austria and legal expenses. 

Going forward the group’s headline pre-tax profit expectations for 2019 remain unchanged.  Forward bookings for Q3 are 3 percentage points behind last year and flat for Q4 with capacity growth expected to be around 7%.  Revenue per seat at constant currency in H2 is now expected to be slightly down, not helped by the ongoing impact of Brexit-related uncertainty as well as a wider macroeconomic slowdown in Europe.  This is offsetting the move of Easter into H2, the second half phasing benefit of the new accounting measures, improvements in Berlin and more disciplined capacity growth. 

The headline cost per seat excluding fuel at constant currency is now expected to down too, however.  This includes the benefit from their investment in operational resilience to manage the impact of disruption.  With jet fuel remaining where it is, the fuel bill is likely to increase by between £25M and £60M but exchange rates are likely to have a £10M positive impact on profits. 

Macroeconomic uncertainty surrounding Brexit have driven weaker customer demand in the market such that they have seen softness in ticket yields in the UK and across Europe. Given this uncertainty, the outlook for the second half is now more cautious and the Brexit delay may continue to adversely affect customer demand into 2020.

At the current share price the shares are trading on a PE ratio of 10.6 but this rises to 14.1 on the full year consensus forecast.  The shares are currently yielding 6.1% but this reduces to 4.5% on the full year forecast.  At the period-end, the group had a net debt position of £201M compared to £135M at the year-end.

On the 6th June it was announced that Chief Commercial and Strategy Officer Robert Carey purchased 2,500 shares at a value of £23K. 

On the 18th July the group released a Q3 trading update with performance overall in line with expectations.  Revenue per seat was positive with positive ancillary revenue growth and a solid Easter performance along with a positive £10M affect relating to the move to IFRS 15 accounting.  Total revenue increased by 11.4% with passenger revenue up 10.7% and ancillary revenue increasing by 14.3%.  Passenger numbers increased by 8%, driven by an increase in capacity pf 10% with load factor down 1.7 percentage points to 91.7% due to late yield initiatives and a high prior year comparative linked to Industrial action in France and Monarch’s bankruptcy.  Total revenue per seat was up 0.7%.

The headline cost per seat excluding fuel at constant currency decreased by 4% reflecting investments in operational resilience with lower levels of disruption, cancellations and delays; wet leasing fewer aircraft due to the Tegel ramp up in Q3 last year and lower employee incentive payment accruals. 

The headline pre-tax profit for the year is expected to be between £400M and £440M, in line with market expectations. 

Overall then this has been a rather tricky period for the group.  Losses increased, net assets declined and the operating cash flow deteriorated.  Some free cash was still generated, however.  There are a number of issues here.  Demand is really not being helped by Brexit, the move of Easter into the second half has not helped, there was no repeat of the one-off incidents that helped last year and perhaps more worrying is the fact that the fuel bill is starting to climb considerably.  Offsetting this somewhat is capacity growth and an improved cancellation performance.  The shares aren’t exactly that cheap either with a forward PE of 14.1 and yield of 4.5%.  Could be time to cut losses here?


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