EasyJet visibility better ride still bumpy

EasyJet shares remain on an erratic flight path as its long-haul fight against rivals continues.

For many investors though, the low-frills airline is too much of a bumpy ride. After collapsing in the wake of last June’s Brexit vote its shares touched a three-year low around 850p in October. Then a shallow ascent held till February before a more impressive 50% uplift between end-February and earlier this month.

Then came the stall—a 10% dive in 4 sessions. It all goes to show that there’s no lack of shareholder interest in Europe’s Number Two low-cost airline, which is now the eighth largest airline in the world. With a yield of 4%, negligible debt, cheaper forward rating than Ryanair but better growth history than ICAG, in theory, easyJet offers British investors an easy way to play European air travel.

Admittedly, it was alarming that the group turned cash flow negative in 2016, for the first time this decade. It’s the impact of a plan to grow seat capacity by 9% in the year to end-September 2017. EasyJet also wants to cut total cost per seat by 3% year-to-year by then in constant currency terms, with the ultimate goal of returning to 2015 cost per seat levels by 2019.

That’s where the cash flow has gone—including the purchase of 30 larger A321 NEO Airbuses each of which offer 49 more seats than most of the fleet. NEOs are therefore cheaper to run; perhaps as much as 9% cheaper. "We said it would be a bit of a bumpy ride as we make some investments," was one blunt comment by easyJet’s CFO Andrew Findlay on Tuesday.

The group doesn’t appear to be in the market of offering optimists much hope right now. For us, that underscores a bloody-minded determination to stick to plan, though it’s a gamble. After all, investors can either conclude that the group’s willingness to risk alienating them points to easyJet having assessed its chances of success as high, or investors can sell.

The group did however give its best signal yet on Tuesday that its strategy is having the desired effect, pointing to falling price pressure. It noted competitors are pausing instead of going up against it in the biggest markets. At the same time, easyJet’s summer bookings are up on the year, backing broader forecasts of a 4% rise in European demand.

Still, a loss that widened to £212m from a £21m loss in H1 2016 doesn’t tend to go down well under current circumstances. Less nervous flyers may recall that easyJet is typically loss-making in the first part of most years. They might also note that this year was compounded by a late Easter. Keeping £250m back from prior capex plans over three years will also come in handy. EasyJet’s nod to City estimates of around £367m pre-tax profit logically follows.

It’s no forecast upgrade to be sure, which partially explains the stock’s acceleration lower on Tuesday. But in our view, easyJet’s post Brexit plan looks almost faultless. Perhaps though, it might consider dropping the no-frills approach when communicating to investors.

• Having struggled to the 38.2% interval of its Brexit vote decline—23rd June-27th June—EZJ has only a moderate probability, from our reading, of retaining hard won gains so far this year
• Sure, the stock settled above its 21-day exponential average this evening at 1215p, also handily close to that 38.2% Fibonacci interval. But if there is one situation when momentum oscillators should never be ignored, it’s when they’re pointing lower in a downtrend and have room to go further—see slow stochastic sub-chart
• The beginnings of an ascending channel might be respected, though that would still leave more than 200 pennies before the shares hit a lower bound
• Look for the collapse of the support zone that was formerly resistance between 1201p-1178p for confirmation that the current down leg can extend.
• At that point, the risk that the stock could shoot past its November 2016 low on the downside would also increase
• Stabilisation above or within 1201p-1178p would probably come as a relief for determined holders. It would be the clearest sign yet that EZJ might be over the worst