easyJet (LON: EZJ) has recently made the headlines for all the wrong reasons. The budget airline has cancelled hundreds of flights and left thousands of passengers in limbo over recent weeks due to operational issues including an IT failure and air traffic restrictions.
Despite this, easyJet’s share price has continued to trade roughly in line with the wider stock market. It is currently down 16% year-to-date, while the FTSE 250 index has fallen by 14% over the same period.
Clearly, operational issues that result in cancellations could persist in the short run. However, on a long-term view, the budget airline’s investment case remains relatively attractive.
Improving performance
easyJet’s latest half-year results showed it is making encouraging progress. Passenger numbers increased by 471% versus the comparable period of the previous year and revenue grew by 524% to £1.5bn, as operating conditions continued to improve due largely to an easing of pandemic-related restrictions.
Capacity for leisure and domestic routes stood at 113% and 104% of pre-Covid levels, respectively, in the first half of the year. Importantly, the airline has been able to successfully reallocate over 1.5m seats to its strongest performing markets. This highlights its adaptability while some parts of the travel industry recover at a faster pace than others.
In addition, easyJet’s ancillary revenue streams contributed to a 45% increase in revenue per seat versus the prior year. They include new bag and fare options that could act as catalysts on the firm’s profitability while the travel and leisure industry faces continued uncertainty.
A margin of safety
Crucially, easyJet has been able to maintain a robust financial position throughout the pandemic. For instance, it raised £1.2bn in a September 2021 rights issue. It now has net debt of just £600m and can call on £3.5bn in cash deposits to fund its operations during what remains a challenging period for the wider airline sector.
Indeed, threats such as rising fuel prices and the effects of high inflation on consumer confidence are likely to have a negative impact on the company’s financial performance in the short run. And, with Covid-19 continuing to cause lockdowns in some regions, its potential to harm the outlook for travel and leisure firms remains heightened.
However, easyJet’s share price appears to factor in the difficulties it faces. It currently trades on a forward price-to-earnings ratio of around 12 using next year’s forecast earnings. Its prospective price-to-earnings ratio falls to 9 using expected earnings for the 2024 financial year. This suggests that its recent share price decline provides a worthwhile buying opportunity for long-term investors.
Long-term potential
Clearly, further operational issues and an uncertain trading environment could exacerbate weak investor sentiment towards easyJet. Therefore, share price volatility appears to be a given over the short run.
But with a solid financial position, an improving outlook for the travel and leisure industry as Covid-19 restrictions abate, and the company’s capacity to adapt to changing operating conditions, easyJet offers good value for money on a long-term view. As a result, investors who are able to look beyond its current difficulties could be well-rewarded.
