easyJet winning year leaves visibility low

Survival of the second-biggest

easyJet’s gambit has worked. 18 months of pain has positioned it more securely on the heels of arch rival Ryanair. It’s been a brutal and in some cases terminal campaign against rivals. Grist to the mill for Europe’s second largest passenger carrier, though it has wisely avoided any hints of a plan in such terms. easyJet does accept that the resulting reduction of capacity has placed a floor under prices, with Ryanair own goals helping. The result is a modest top-line surprise at easyJet in the closing months of the year with headline profits £2m above the midpoint of guidance. It also makes sense to see improved insulation for the carrier against Europe’s notoriously volatile airline industry in coming quarters. Whether or not there’s much growth to speak of on the other side of these battles is a key question.

How much of a win is Berlin?

In fact, Tuesday’s update provides little quantification of potential benefits from stabilisation on any of easyJet’s fronts this year. These include its successful conquest of the Berlin short-haul market. Losses of around £60m linked to Air Berlin’s Tegel hub next year will come on top of what easyJet says will be one-off costs of £100m related to the purchase of the carrier, and for what has to be a flawless transition. Accretion from the purchase is projected for 2019, with no details. We see a mechanical lift of earnings as all but inevitable, eventually, but with Europe’s seat price war lingering, Berlin could be more of a draw on cash than envisaged in lieu of complete integration.

Net cash for now

On another watch, easyJet’s cash position has now reassuringly filled out. Even so, 2018’s exceptional $1.2bn capex demand, almost double this year’s, makes another dip into a negative net cash state possible at some point next year.  “Ruthless focus on capital allocation”, sitting within easyJet’s increasingly sophisticated cash regime, will help ensure the impact is not severe. The group has also taken out a new £2.6m per seat business interruption policy with Munich Re. The £150m cover insures against increasingly frequent external upsets that are unlikely to return to previous baselines for several years. The move frees up cash, though again, easyJet can’t say how much. The company’s win from improved cash flow management consequently has limits that could yet bring its policy of paying dividends from profit into question, albeit not in 2018.

Visibility limited

More broadly whilst revenue per seat is forecast to turn positive next year, “visibility for the second half of the financial year is very limited.” Hence profitability expectations remain scant. In short, whilst easyJet shares have maintained recovery momentum into year-end, up 36%, it’s time for another inflection point, and the ‘short-haul discount’ continues to apply.