Travel and leisure company Jet2’s (LON: JET2) share price has yet to fully recover from its pandemic-induced decline. The airline and tour operator’s shares trade around 40% down on their pre-Covid level due largely to continued disappointing financial performance and an uncertain outlook.
Indeed, the company’s half-year results showed it made a loss of almost £164m in the six months to 30 September 2021. This represented a 138% increase on the loss made in the same period of the prior year. Its deteriorating performance was largely due to hugely challenging trading conditions that included no flying activity for several weeks and fluid travel restrictions that contributed to fewer bookings.
Covid-19 recovery
Although the company’s recent performance is likely to have been very mixed due to the emergence of Omicron in the latter stages of 2021, its future prospects could be much brighter. Ultimately, travel restrictions are unlikely to remain in place over the medium term as Covid-19 becomes endemic. This should mean that demand for the firm’s offering increases significantly over the coming months and years.Encouragingly, Jet2 reported at the time of its half-year results that forward bookings and load factors improved markedly following an easing of travel restrictions in early October. As this process continues, the firm could be a major beneficiary of rising demand for leisure travel.
In the meantime, the company appears to have sufficient financial resources to survive. As at the end of September 2021, its own cash balance, which excludes customer deposits, stood at £1.5bn. This suggests it has the capacity to overcome further unexpected difficulties and benefit from a likely long-term recovery in the tour operator and airline segments.
Rising costs
Of course, the cost of living crisis could have a negative impact on the travel and leisure sector. Consumer discretionary incomes are set to come under increasing pressure over the coming months. This may mean that non-essential items, such as holidays, are scaled back or even cancelled in some cases. As a result, the near-term prospects for Jet2’s share price could be relatively uncertain.
In addition, high inflation could negatively impact on profitability even as sales recover. For example, the cost of fuel has soared in recent months and, depending on geopolitical circumstances, may act as a drag on the wider sector’s recovery as Covid-19 becomes endemic.
However, Jet2’s valuation appears to factor in the prospect of continued difficult trading conditions. Using forecast earnings per share of 120p for the 2024 financial year, the company’s shares trade on a forward price-earnings ratio of 9.5. This suggests they offer a margin of safety in case earnings disappoint versus expectations.
Long-term potential
Overall, Jet2’s share price could struggle to recover to its pre-pandemic levels in the short run. Rising costs, a cost of living crisis and ongoing Covid-19 uncertainty may weigh on its investment prospects in the coming months.
However, over the long term, it appears to have significant recovery potential. Its financial position and attractive valuation mean it is well placed to deliver share price growth as demand for holidays likely returns to pre-pandemic levels.
