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easyJet (LSE: EZJ) shares have had a torrid time. At today’s price of 333p, they’re back to levels last seen in late 2011. That’s almost 15 years ago, so what on earth’s gone wrong?
The budget airline has suffered blow after blow. Covid crushed global travel demand, fuel costs surged after the Ukraine invasion, the cost-of-living crisis squeezed consumers, and fierce competition kept fares under pressure.
Anybody who bought the shares in March 2015, when they peaked at 1,584p, will be sitting on a 79% loss today. The stock’s continued its descent, falling almost 40% over the last 12 months.
Unsurprisingly, the Iran crisis has piled more pressure and rattled investors again. Today (18 May), Brent crude hit $111 a barrel on fears of summer shortages. No prizes for guessing the impact on the easyJet share price.
Can it bounce back like Rolls-Royce?
easyJet’s first-half results (16 April) showed the conflict had already added £25m to fuel costs. That was purely in March, the final month of the half-year period.
easyJet holidays still performed strongly and load factors edged up to 90%, but bookings weakened as customers tightened their belts. The group expects to report a first-half underlying pre-tax loss of £540m-£560m, well below market forecasts of £421m. Net cash stood at £434m, but presumably not for long. The trailing dividend yield is 3.95% but cuts are surely on the way. The forecast for 2026 is 1.75%.
Investors considering the stock today need strong nerves. Some may be emboldened by memories of Rolls-Royce Holdings. That’s the FTSE 100 recovery stock par excellence.
Rolls struggled for years, but it’s problems came to a head during the Covid pandemic in 2020, when grounded fleets smashed revenues from aircraft engine maintenance. It was in a far worse state than easyJet, scrambling for cash just to survive. Then air travel returned, engine flying hours recovered, new CEO Tufan Erginbilgiç waltzed up and the shares took off like a rocket. Could a similar recovery story unfold here?
How bad will the summer be?
My answer is possibly, but not yet. easyJet runs on tight margins and typically spends around a quarter of revenue on fuel costs. That leaves it more exposed to oil price swings than most rivals. It’s bad luck that the group also happens to be investing heavily in upgrading its fleet. The spend, combined with the oil price spike, threatens to push free cash flow into negative territory.
Yet easyJet has assured customers that it expects to operate a full summer schedule, despite Iran. Let’s hope it pulls that off. Investors looking at the group’s rock-bottom price-to-earnings ratio of around five may wonder whether it’s just too cheap to resist.
I think the shares could take off one day. Possibly even like a rocket. Just not yet. Rolls-Royce had to endure years of punishment before its turnaround arrived, and easyJet investors may well need the same patience. I won’t be buying them today but, at some point, I think there’s real excitement on offer here for investors who are up to the challenge. I’ll be watching easyJet closely. Will you?
Harvey Jones has positions in Rolls-Royce.
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