EasyJet annual profits soar, eyes holiday expansion

EasyJet's profits soared more than 41% in the past 12 months but the budget airline sees potential for greater growth by expanding its holidays business.

Headline profit before tax for year ending 30 September came in £578m as revenues grew 17% to £5.9bn. EasyJet had indicated in a detailed pre-close update group that profits would come in between £570m and £580m.

With 88.5m passengers flying and aeroplanes 92.9% full, revenue per seat grew 6.4% to £61.94 and, even despite disruptions and wage inflation resulting in headline cost per seat rising 5.3%, PBT per seat surged 28.7% to £6.07. With net cash of £396m a dividend of 58.6p was proposed, up 43% on last year's.

Chief executive Johan Lundgren's cost and efficiency programme brought savings of £107m across the year, but this was offset by "non-headline" costs of £133m, including £40m from expansion at Berlin Tegel after taking over Air Berlin's operations there, a £65m charge from changing the approach to IT development and £7m Brexit costs as it re-registered aircraft in Austria and paid legal costs to establish new Airline Operator Certificates. Total losses at Tegel were £112m, which was slightly lower than expected.

Lundgren, who joined last December, hailed the record number of passengers at the company's highest ever annual load factor, the progress at Tegel and "increasing customer loyalty", which could be strengthened as he plans to introduce a new frequent flyer scheme will be introduced over 2019/20.

He added: "Our strategy continues to ensure we are well positioned for the future. We have made considerable progress on our new initiatives in holidays, business and loyalty, which will enable us to grow profitably. While disruption continues to be a major challenge for the industry, we are investing in resilience to help to mitigate the impact on our customers."

This included the appointment earlier this month of ex-TUI product and purchasing director Garry Wilson as easyJet's first ever chief executive of EasyJet Holidays.

With the company noting that of the 20m passengers flying to its top 29 destinations only 0.5m booked a hotel with the company, Wilson will build a team and "total customer offer" ahead of an expected launch in late 2019 as the company looks to use its brand strength and customer data to "extend its reach in the wider travel value chain through the offer of accommodation and other services".

The company said its market share, frequency and cost position "that no one else can match" on the biggest and most attractive flows into the most popular destinations in Europe, aiming to improve profits "significantly" its by moving to a contribution rather than commission model, developing direct relationships with a large number of hotel partners across Europe.

Lundgren also wants to expand EasyJet's business offer through the development of "business products, a recognition programme and improved back-office functionality" with the aim of reaching a "fair share" of European short-haul business travellers.

Looking to early trading in the 2019 financial year, Lundgren said forward bookings are "solid", with 50% of seats sold in the first half, in line with the prior year.

Guidance had already been published for capacity to increase 15% in the first half and 10% for the full year, including the annualisation of Tegel, with revenue per seat at constant currency to decrease by low-to-mid-single digits in the first half due to several one-off revenue benefits last year and a later Easter next year. Full-year non-fuel cost per seat are expected to be flat at constant currencies, with capital expenditure expected at £1bn.

"We are confident in our positioning for the future and are focused on driving future returns, positive free cash flow over the longer term and maximising our headline profit per seat as we continue to deliver value for our customers and shareholders," the Swede said.

MARKET REACTION & ANALYSIS

EasyJet shares, having recovered from October's 18-month lows i recent weeks, flew lower on Tuesday morning, down almost 4% to 1,133p.

Brexit remains a concern for investors, not just because of the impact a disorderly exit from the EU, as the current 47% of shares owned by non-UK EU nationals, might need to rise above 50% for European operations to continue post-Brexit.

Analysts at RBC Capital Markets said profits were in line with expectations and, "despite the Brexit/EU shareholder stand-off", they see the 5% dividend yield and "recession-like multiple" of 10 times forecast earnings per share "offering reason to look further at the shares".

RBC alluded to the company's short-term share ownership issues due to Brexit, as EasyJet’s shares face a "technical rotation issue where UK investors may be unwilling to buy shares with confidence of long-term retention, while potential EU investors face questions of when the best time is to buy if there might be forced sellers".

Broker Kepler said noted headline PBT of core activities was "slightly weaker than we had expected due to slightly higher non-fuel cost development, which we understand are the result of high levels of disruptions".

Kepler, which has a target price of 1,659p on the stock, said it values easyJet based on its historical 12-month forward P/E multiple of 13.8 times.

It was a "blowout year", said market analyst Neil Wilson at Markets.com, though he said costs are a "mild concern" with disruptions and wage inflation resulting in headline cost per seat rising 5.3%.

"Certainly EasyJet has benefitted from the failure of other airlines as well as the various Ryanair fiascos of late, but equally this looks like a very well run business....It does look like EasyJet is weathering the turbulence from air traffic control strikes, wage inflation and higher oil prices better than most. It should also stand to further benefit as the European short haul sector undergoes a painful period of consolidation."

George Salmon at Hargreaves Lansdown said that while this was a strong set of results, attention is likely to focus on what’s happening next, including the Brexit share issue.

"The tailwind from cheap fuel is fading fast, and revenue per seat is set to dip. That puts the emphasis on easyJet to increase operating efficiency over the costs it can control, but the group hasn’t got a great recent record here and looking ahead underlying costs are expected to flatline rather than descend."