The airline, easyJet (LSE: EZJ), has had a challenging couple of years, with a highly uncertain demand outlook for air travel hurting its fortunes. Yet the easyJet share price is still up 47% over the past year, at the time of writing today. Lately, though, it’s been falling. The shares have lost a third of their value since May.
Here I consider whether this downward trend could continue.
EasyJet and the demand challenge
The problems facing easyJet have been similar to those of rivals such as Ryanair and British Airways owner IAG. Plummeting demand last year saw revenues collapse. It has been difficult to get visibility on when and how fast travel demand might return, due to constantly shifting and complex regulations. Airlines have high fixed costs, so even though revenues may not have been coming in, a lot of money has to keep going out.
EasyJet had some advantages going into the pandemic. It enjoyed a strong balance sheet and owned many of its planes, giving it extra financial flexibility. Nonetheless the company has struggled so much that it had a £1.2bn rights issue last month. That helped raise more funds to boost liquidity, but at the cost of diluting existing shareholders. On top of that, rival Wizz announced its interest in taking over easyJet. While easyJet has rebuffed that advance for now, it is stark evidence that its competitors see weakness in its position.
Yet for many years, easyJet was seen as an attractive company by investors. Not only did it have robust finances, it paid out a big dividend each year. Its most recent full-year dividend – for 2019 – was 43.9p per share. At the current easyJet share price, that would equate to a yield of around 7%.
While the pandemic has battered the airline, there are signs that demand is recovering. In its July to September quarter, the airline flew over 17m seats. That is 58% of the pre-pandemic 2019 level. That is still a big reduction, but still much higher than last year. In the current quarter, the airline expects capacity to hit 70% of the 2019 level. The airline sees positive momentum for the coming year, and expects bookings in the October to March period to be double those of the equivalent timeframe last year.
If passenger numbers recover, revenues increase, and losses are cut, the current easyJet share price could yet be come to be seen as a bargain. After all, Wizz is an astutely run business. If it saw value in the easyJet share price, might the same be true for me?
My take on the easyJet share price
While Wizz could benefit strategically from a takeover, the same doesn’t apply to me as a private investor potentially buying easyJet shares.
The airline’s demand recovery continues to look fragile. Any further travel restrictions could lower passenger numbers. That could lead the share price to fall lower. Meanwhile, I remain concerned about the liquidity risk at easyJet. The company has close to £1bn in net debt. If further restrictions dampen demand, there is a risk that negative cash flow could strain liquidity further. That could lead to more shareholder dilution.
Whatever the prospects for demand recovery, I see many risks to the easyJet share price. I won’t be adding it to my portfolio.
The post Will the falling easyJet share price keep falling? appeared first on The Motley Fool UK.
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Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.