EasyJet profit outlook still up in the air

More drag, less lift

Uncertain succession plans and an admission of continuing vulnerability in pricing over the key summer months are dragging EasyJet shares harder than upgraded profit guidance can lift them on Thursday. The stock lost around 6% a short time ago, trimming a gain of more than 40% this year by the beginning of the week. The hazy succession process at the top of the group is not helping.

No word on when there'll be word

The lack of any sort of framework on timing for the announcement of a successor would be odd if CEO Carolyn McCall had given the board fair warning about plans to decamp. Whether events permitted the provision of adequate notice is not known. But the hint of a disruptive transition doesn’t play well during turbulent times for European airlines. It’s these circumstances that have forced the group to expand guidance over a not particularly useful range of £40m, though at least the expansion is to the upside. Oil prices hit a ceiling in January and bottomed in June. This kept the door open for what EasyJet calls “inefficient capacity in the European short-haul market…which continues to drive lower fares.”

Post peak passenger price

In other words, improved efficiency, and its cost and scale strategy are still not guaranteed to offer the edge EasyJet needs. It’s worth noting that if revenue per available seat km has already peaked for the year, which the group suggests is a risk, it will be capped well below the best recent rate of £5.60, posted in the final quarter of 2016. That was followed by a dive to £4.61 in the quarter to end-March. At the same time, EasyJet’s cost per seat drive has also bottomed for now, with a rise of 1.6% in Q3 (annual guidance is +1%).

Uncertainty over passenger yields does not at this point bring the lower end of new profit guidance into question in our view, but it does make the prospect of further stock upside from here more problematic.

Any chance of an upgrade?

EasyJet’s forward rating can only really be compared fairly with arch rival Ryanair. Yet the British group’s premium 17.88 times this year’s EPS against the Irish carrier’s 14.55 doesn’t match Ryanair’s ability for increased mischief on prices. Ryanair’s free cash flow is forecast to more than double to €911 by year end. EasyJet’s balance isn’t expected to return entirely to positive just yet. Add higher risk that it will also fail to match last year’s net income, and some investors may see the stock at its ceiling for now.

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