easyJet’s (LON: EZJ) share price has experienced wild swings over recent weeks in what has been a very eventful period for the FTSE 250 airline stock.
The company has been the subject of a takeover approach from rival Wizz Air (LON: WIZZ), which was promptly rejected. easyJet has also announced a £1.2bn rights issue that enables existing investors to purchase 31 shares for every 47 they own at a 36% discount to the expected market price following the issue. In addition, the firm has entered into a new £285m revolving credit facility.
According to easyJet, Wizz Air is no longer considering a bid for the company. Meanwhile, its rights issue and new debt facility are designed to improve its financial position while demand for flights remains significantly down on pre-Covid levels.
easyJet has been relatively successful in strengthening its finances over the past 18 months. Prior to the current rights issue and new credit facility, it had raised £5.5bn in liquidity since the start of the pandemic.
Alongside this, it has been able to reduce non-essential spending to cut ongoing costs while capacity and load factors have been significantly down on 2019 levels. For instance, it has introduced a cost reduction programme that is expected to deliver £500m in savings in the 2021 financial year. Of that amount, 50% of savings are expected to be sustainable on an ongoing basis.
Of course, the company’s rights issue and debt facility could provide capital through which to invest in the aviation sector’s eventual recovery. For example, it plans to use them to invest in new fuel-efficient aircraft and build ancillary revenues, as well as easyJet Holidays, to boost revenue per seat over the long term.
However, according to the company, it expects capacity in the first quarter of 2022 to be just 60% of 2019 levels. Moreover, it does not anticipate a return to pre-pandemic capacity until 2023 at the earliest.
As has been the case throughout the pandemic, forecasting the scale of travel restrictions remains a ‘known unknown’. As such, it would be unsurprising for the company’s capital raising to end up being focused on overcoming short-term challenges instead of being used for long-term expansion.
For example, new Covid-19 variants could extend, or strengthen, current travel restrictions that reduce capacity across the airline industry. Equally, its prospects may now improve following the success of the vaccination programme in the UK and, more recently, across the EU. As such, the company’s shares could continue to be highly volatile in coming months.
However, the firm’s strong track record of raising sufficient cash to maintain operations suggests it has the financial means to survive short-term challenges to capitalise on an eventual sector recovery. With pent-up consumer demand making a return to mass air travel likely over coming years, the long-term prospects for the easyJet share price could be relatively sound.