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easyJet shares could soar when it rejoins IAG in the FTSE 100


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The easyJet share price could soar as it rejoins the FTSE 100. But it faces rising costs of debt and oil combined with shaken consumer confidence as Russia invades Ukraine.

easyjetSource: Bloomberg
 
 Charles Archer | Financial Writer, London | Publication date: Thursday 24 February 2022 

The easyJet (LON: EZJ) share price has been through significant turbulence over the past two years. Worth 1,270p in February 2020, the covid-19 pandemic crash saw it collapse to 400p by 3 April. By May 2021 it had recovered to 922p, before sinking to 500p towards the end of November.

Then it soared to 706p on 11 February. However, it's now fallen 5% today to 611p as Russia launches its invasion of Ukraine. But with a £4.9 billion market cap, FTSE Russell is likely to decide tomorrow to eject Cineworld and Dechra Pharmaceuticals from the FTSE 100 in favour of the resurgent airline stock. If it does, then easyJet will rejoin the UK's premier index in March.

easyJet share price: Q1 results

The airline's recent trading update gave off mixed signals for investors. Revenue for the three months to 31 December rose to £805 million, compared to £165 million a year earlier. Passenger revenue rose to £547 million, up £118 million year-over-year. And ancillary revenue per seat of £14.84 was nearly 50% higher than in the same period last year.

However, headline costs rose from £588 million to £1 billion, ‘primarily driven by the higher level of capacity flown compared to the same period last year (and) an increased number of standby crew is being held to proactively protect the operation.’ In a bullish sign, ‘easyJet was the most punctual large European airline in 2021…following a successful recruitment process and preparation for our summer ramp up, easyJet will welcome new crew into the business during Q2 to undertake their training.’

The company halved its headline loss from £423 million to £213 million in the quarter, while cash burn also halved from £969 million to £450 million. And while the airline’s net debt is at £1.2 billion, none of this debt matures until the 2023 financial year.

easyjet 2Source: Bloomberg

Tailwinds, headwinds

Moreover, there are several strong tailwinds for the FTSE 100 airline stock. Most importantly, England has joined Denmark, Norway, and Sweden in lifting all covid restrictions. France has dropped the requirement for vaccinated travellers from the UK to take a pre-departure test, a decision which has been imitated by the European Council for all third-country travellers. easyJet has called the move a ‘welcome step closer towards restriction free travel across the whole of Europe.’

CEO Johan Lundgren believes ‘testing for travel across our network should soon become a thing of the past.’ The airline flew 64% of pre-pandemic capacity in the quarter, compared to 18% capacity a year earlier. And Lundgren forecasts ‘a strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity with UK beach and leisure routes performing particularly well.’ Its position as a short haulier could give it an advantage over long-haul carriers like IAG.

However, multiple factors could arrest the easyJet share price’s take-off. In common with IAG, it is contending with a worsening cost-of-living crisis. Tax rises and increased energy bills are coming in April. And the Bank of England could again raise the base rate from its current 0.5% to stave off rising inflation. This will make selling tickets to cash-strapped consumers harder, while simultaneously increasing easyJet’s debt burden. And with Brent Crude hovering near $100 a barrel, and rising, the airline has limited pricing options.

Of course, there’s also the impact of the Ukraine crisis to consider; many commercial airlines have already stopped flights to the country. As Ukraine's foreign minister accuses Russia of starting a full-scale war, airline monitor Safe Airspace has increased the country’s airspace risk level to ‘do not fly,’ saying ‘the level of tension and uncertainty in Ukraine is now extreme.’

Capital Economics analysts believe that the Ukraine crisis could see inflation spiking faster, forcing central banks to raise interest rates faster. They contend that ‘this geopolitical flare-up is likely to speed up the process of Russia's decoupling from the West.’

The potential implications for easyJet are clear. Its debt and oil will cost more, while consumer confidence will take a hit from a military crisis and heavily reduced disposable income. The airline may even be bumping up spending for a summer season that fizzles out before it begins.

Of course, a return to the FTSE 100 means the stock will once again be boosted by passive FTSE 100 index investors. But with the future so uncertain, the easyJet share price may be more volatile than volitant.

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