EasyJet gets bumpy ride on trading update

Struggle

So, what are investors worried about?

One thing is causing investors a lot of concern: revenue per available seat.

EasyJet´s revenue per seat fell by 3.7% in the final quarter of its 2017 financial year, and is also 1.4% lower over the past six months.

It underlines the struggle that European airlines are facing in what is a crowded market.

Alitalia, Air Berlin and Monarch Airlines have all gone bankrupt and there are worries that yet more European airlines could soon find themselves in need of a financial parachute.

Shares boost

Budget airlines have been in the news for all the wrong reasons over recent weeks.

Of late, easyJet shares have been propelled higher by the woes of its arch rival Ryanair, which was forced to cancel thousands of flights due to a lack of pilots.

Ryanair had been attempting to confront the overcapacity in the market by running its business with very little slack.

The strategy seriously backfired as regulatory changes compelled airlines to recalculate the way they work out the number of flying hours for cockpit crew. Regulators don´t want airlines to overwork pilots for safety reasons.

Then there´s this week´s collapse of Monarch Airlines, which gave easyJet shares another boost.

Once today´s fall is factored in, easyJet´s shares are still around 12% higher over the past month.

Summer record

Over the three months to the end of September, easyJet carried 24.1m passengers as capacity reached a high of 95.6%.

Record passenger levels over the summer means easyJet believes its annual profits will be in the region of £405m to £410m.

This is despite earnings having been hit by sterling weakness in the wake of last year´s Brexit vote.

However, the profits guidance falls well short of the £495m that easyJet achieved in 2016, while it´s even further behind the £686m it notched up in 2015.

Airlines have been competing fiercely on price, with easyJet acknowledging sharp falls in ticket prices to beach destinations.

Overcapacity

With Europe´s short-haul flight market continuing to be plagued by overcapacity, it seems highly likely that the sector will face a round of consolidation, with mergers and acquisitions likely to figure more prominently.

Today, the European market looks a lot like how the US market appeared a decade ago.

Back then, the top four US airlines controlled around 40% of their domestic market. The biggest four US airlines now account for 70% of that market.

In Europe, the big four – Ryanair, easyJet, Lufthansa and British Airways owner IAG – currently control 49% of the market.

Strong position?

If the European market does end up looking more like the US market does today, then easyJet could be in a strong position.

The demise of Alitalia, Air Berlin and now Monarch makes such an outcome appear highly plausible.

Then there´s also the question of whether Ryanair, currently the biggest European short-haul operator, can repair its reputation.

If not, then this could be a further boost for easyJet.

Brent factor

Investors need to tread carefully. In its latest update, easyJet claims its fuel spend should drop by about £230m in the current financial year. The fuel savings have been a major factor propping up its bottom line.

Brent crude is roughly half the level that it was just three years ago, so lower fuel prices have been a big shot in the arm for airliners such as easyJet.

Over recent weeks, Brent has started to pick up as Opec and its allies have claimed to be making progress on cutting production and Chinese imports have accelerated.

Brent remains subdued at only $55 per barrel, but if the recent trend accelerates this will be another big problem for the airlines.

At the same time, higher crude prices could prove to be a double-edged sword for easyJet.

Higher costs could make the inevitable consolidation of the European airline sector move more quickly, of which easyJet could become a major long-term beneficiary.