It is never easy running an airline, as there are so many variables in the mix, from fuel costs to passenger demand. Despite that, easyJet (LSE:EZJ) has been one of the success stories of the British aviation sector in recent decades. Last year, for example, its headline pre-tax profit before tax was £0.7bn. Yet the firm currently has a market capitalisation of under £3bn. So, easyJet shares are selling for less than six times their statutory earnings.
There is an obvious reason for that: the Middle East war threatens to see passenger demand fall, while jet fuel prices have surged. It expects to report a headline pre-tax loss of between £0.5bn and £0.6bn for the first half of its current financial year.
Still, easyJet has triumphed through adversity before.
The pandemic hammered the shares, but they went on to more than double between October 2020 and April of the following year.
In just six months, that meant a great return for investors who had been brave enough to buy when the market had pushed the share price down.
Can easyJet ride the latest storm?
Just because something has happened before does not necessarily mean it will happen again.
History is littered with airlines that have successfully navigated multiple crises – until they met one that they could not survive.
Having said that, I am fairly upbeat about the medium- to long-term outlook for easyJet.
It has a well-honed, proven business model. Even if passenger demand does fall temporarily, when it bounces back I reckon the carrier is well-positioned to benefit from it.
Anyway, in its most recent quarter, the company said that “strong late demand for domestics, cities and the Western Mediterranean offset war-related softness in Egypt, Turkey and Cyprus”.
This looks pretty tempting to me
Plus, easyJet has entered the latest challenging period for aviation in good financial shape. It has net cash of £0.5bn with a lot of additional liquidity (like agreed borrowing capacity) it can call on should it need to.
The company has also hedged 70% of its summer fuel needs, meaning that even if prices go up it will not pay more for that percentage of its fuel needs. Still, costs could potentially soar on the unhedged 30% depending on what ongoing Middle Eastern uncertainty means for the oil market.
From a long-term perspective, I feel confident the carrier can ride the current storm. In fact I think its current price undervalues the long-term potential and could end up looking like a deep bargain a year or two from now.
I’m watching, but not in a hurry
Still, I am hesitant.
Airlines can often look like terrific bargains when the chips are down – but they may still turn out to be horrible investments.
There are some simple reasons for that: passenger demand and fuel costs are often outside airlines’ control, even though they can hedge their fuel costs in the short term. The industry is competitive and complex. Running costs are high, even when planes are not well-utilised.
I am going to wait a bit and try to get a firmer idea of whether the current short-term challenges for easyJet and its peers look set to end soon, or develop into more enduring problems.
Cheap though easyJet shares look, I am not ready to buy any just yet.
This story originally appeared on Motley Fool
