14-May-2014 5:35 PM

EasyJet narrows its winter losses as it attracts more business travellers

Analysis

The airline business is a seasonal one and European airlines tend to lose money in the winter. EasyJet is no exception in this respect, but it has again narrowed its winter loss in 1HFY2014. With targeted capacity growth, it increased its revenue per seat faster than cost per seat.

Revenue per seat was also helped by a growing number of passengers flying for business purposes. On a rolling 12 month basis, easyJet said that it carried 12 million business travellers in the year to Mar-2014, around 20% of total passenger numbers. Since it started to target business passengers in 2010, the number has grown by 44%, demonstrating what can be achieved without having a business class cabin.

Competitor capacity growth is accelerating this summer and easyJet will see its own growth accelerated by the inclusion of Gatwick slots acquired from Flybe. This may lead to some downward pressure on yields, although the strength of its network and product features such as allocated seating may mitigate this. Certainly, narrower winter losses place it well for another year of healthy growth in profit.

Summary

EasyJet has narrowed its winter loss in 1HFY2014, with targeted capacity growth and increased revenue per seat.
The number of business passengers flying with EasyJet has grown by 44% since 2010, contributing to increased revenue per seat.
Competitor capacity growth is accelerating this summer, but EasyJet's strong network and product features may mitigate any downward pressure on yields.
EasyJet reduced its loss before tax to GBP53 million in 1HFY2014, the third successive year of reducing seasonal losses.
EasyJet's seat capacity increased by 3.6% in 1HFY2014, with a load factor of 89%.
Total revenues grew by 6.3% in 1HFY2014, with revenue per seat increasing by 2.6%.

1H losses reduced for the third successive year

In 1HFY2014 (six months to Mar-2014), easyJet narrowed its loss before tax to GBP53 million from GBP61 million a year earlier. This was a little better than the guidance it gave on 25-Mar-2014 that the loss before tax would be in the range GBP55 million to GBP65 million. It was the third successive year in which the seasonal losses of the winter half were reduced. Its loss per seat was GBP1.70, a 69% reduction in the loss per seat of GBP5.47 in 1HFY2011.

Revenues grew by 6.3% to GBP1,702 million, but return on capital employed dipped slightly to -1.2% from -0.9%. The company's cash balance fell slightly, but remained in excess of GBP1 billion and balance sheet debt also fell, so that its net cash position increased from GBP433 million a year earlier to GBP449 million at the end of Mar-2014.

With the inclusion of operating leases capitalised at seven times annual rentals, net debt as a percentage of total capital employed increased from 1% to 18%, but easyJet still has one of the strongest balance sheets among European airlines.

EasyJet financial highlights: 1HFY2014 vs 1HFY2013

EasyJet first half pre-tax loss per seat and pre-tax margin, (GBP million): 1H2011 to 1H2014

EasyJet seat capacity up 3.6% in 1H2014, with 89% load factor

EasyJet added seat capacity at the rate of 3.6% year on year and carried 4.0% more passengers, driving a 0.4 ppt increase in seat load factor to 89.0%. This is a very high load factor for the winter season and easyJet has almost completely eliminated the gap between 1H and 2H load factors: its FY2013 load factor was 89.3%, one of the highest in the industry.

CEO Carolyn McCall said at a presentation to analysts on the 1H results that there was a "constant debate" about the balance between load factor and yield. CFO Chris Kennedy added that easyJet does not target load factor, but total revenue per flight.

Its average sector length increased by 3.1%, driving ASK growth of 6.8%. Its passenger load factor calculated on the basis of RPK divided by ASK actually dipped slightly, from 90.9% to 90.5% (according to our calculations). This decline contrasts with the load factor gain based on the number of passengers divided by the number of seats, implying that the passenger growth in 1H was more concentrated on shorter routes. However, since the ASK load factor is still higher than the seat load factor mentioned above, this implies that longer routes are being filled better than shorter routes.

EasyJet operational KPIs: 1H2014

Revenue per seat up 2.6%

Total revenues grew by 6.3%, ahead of the growth in the number of seats, so revenue per seat increased by 2.6% to GBP54.80 (at constant currency, revenue per seat grew by 1.5%). Unit revenue performance was helped by improved capacity allocation across easyJet's route network, improvements to the website and the digital offering, allocated seating and bag charges, increased sector lengths and an 8.5% increase in higher yielding business passengers. In addition, easyJet's competitors cut capacity by 1.3% on its routes in the period.

EasyJet total revenue and revenue per seat: 1H2014

As noted above, seasonal load factor differences have all but been eliminated, but there is still a significant unit revenue difference. EasyJet's 1HFY2014 revenue per seat was much lower than the figure of almost GBP70 for 2H2013 (last northern summer). Winter demand must be stimulated with lower prices, but easyJet's cost per seat in the winter half is typically very similar to its summer cost per seat and this gives rise to seasonal winter losses.

EasyJet has reduced its losses in the winter half year every year since FY2011, because it has grown its 1H revenue per seat by 21%, while holding the increase in 1H cost per seat to 12%.

EasyJet revenue per seat and cost per seat (GBP) by half year: FY2011 to FY2014

Cost per seat up 1.9%

Total cost per seat increased by 1.9%, less than the increase in revenue per seat. Fuel cost per seat grew by 4.6% and ex fuel cost per seat grew by 0.8%, or 0.5% at constant currency. Airport and ground handling cost per seat fell by 2.5% at constant currency, helped by lower de-icing costs, initiatives under the 'easyJet Lean' cost programme and higher load factors.

Crew cost per seat increased by 3.2% at constant currency, due to higher salaries and longer average sector lengths. Average sector lengths also drove higher navigation cost per seat. Maintenance cost per seat increased as a result of a higher number of leased aircraft and increased average fleet age.

The company's 'easyJet Lean' programme delivered savings of GBP14 million in the six months and Mr Kennedy told analysts at the 1H results presentation that he was confident that the programme would continue to provide GBP20 million to GBP30 million every year.

EasyJet cost per seat and year on year change at constant currency: 1HFY2014

A320s now 30% of the fleet

EasyJet's fleet increased by a total of 10 aircraft over the 12 months to 31-Mar-2014 to reach 220. Its A319 fleet reduced by one to 153, while its A320 fleet increased by 11 to 67 aircraft.

The higher percentage of A320s in the fleet leads to cost per seat advantages and will continue to rise. The larger A320 gives a cost per seat saving over the A319 of 7% to 8%. From 2018, easyJet will start to take delivery of the A320neo, with a further cost per seat advantage of 4% to 5%.

EasyJet fleet at 31-Mar-2014 vs 31-Mar-2013

EasyJet plans seat growth of 6.7% in 2H2014

In 2HFY2014 (Apr to Sep), easyJet plans seat growth of 6.7% and, according to its analysis of OAG data, competitor growth in easyJet's markets will reach 2.9% this summer, after a cut of 1% last summer. This means that total seat growth in its markets (easyJet plus competitor capacity) will accelerate to 4.1% in summer 2014 from 0.6% in summer 2013, according to the same source. While capacity growth is increasing, easyJet describes it as still being disciplined.

Around one third of easyJet's seat growth (2.6 ppts) this summer comes from its acquisition of Gatwick slots from Flybe, which was effective from Apr-2014. According to Ms McCall, it takes 12 to 18 months to "optimise a slot portfolio" such as that acquired at Gatwick and, although mainly not used for new routes, the additional capacity will take time to mature.

EasyJet, the biggest operator at the airport, is in consultation with Gatwick about consolidating its operations into a single terminal. This move, which easyJet hopes may take effect in 2017, should be beneficial both for the passenger experience and for operational efficiency.

Seat capacity growth in easyJet markets: summer 2014 versus summer 2013

Fastest growth planned in Germany, Italy and Switzerland this summer

Focusing on the largest European country markets, easyJet's capacity growth in 2HFY2014 will be highest in Germany (+10%), Italy (+9%) and Switzerland (+8.8%). In France, it plans growth of 7.4%, while in the UK (6.3%) and Spain (4.1%), its growth will be slower. In all these markets, it will grow faster than competitors.

As at 9-May-2014, easyJet had sold 51% of its seats for the period Apr-2014 to Sep-2014 (2HFY2014), compared with 50% at the same stage a year ago. The higher level of sales this year is mainly due to the move of Easter from Mar-2013 to Apr-2014, but easyJet also has a slightly higher level of sales across all summer months compared with last year.

EasyJet seat capacity growth in key European markets: summer 2014

ROCE improvements across the network

Return on capital employed is a key financial metric for easyJet, both for the company as a whole and on a route by route basis. In the 12 months to Mar-2014, easyJet increased the number of routes beating its target ROCE of 12% and network returns improved overall.

Although total ROCE fell slightly in 1H2014, the key to full year returns is the summer half and the company has consistently improved its FY ROCE since FY2009.

Rolling 12 months returns: Apr-2013 to Mar-2014 vs Apr-2012 to Mar-2013

EasyJet's 1H results presentation made reference to IATA's forecast that European short-haul passengers will increase by between 60 million and 70 million by 2018 at an average annual growth rate in the region of 3% pa. The carrier's own analysis of aircraft deliveries suggests an additional 450 narrowbody aircraft will enter the market by 2018, at a similar annual growth rate of around 3%.

Against this backdrop, easyJet's FY2014 seat growth of a little over 5% and medium term planning scenario of annual growth in the range of 3% to 5% looks reasonable. It has a strong pan-European network, which gives it a presence in more of the top 100 city pairs than any other European airline and where it is number one or number two in almost three quarters of its airports. This strong network and its cost advantage versus legacy carriers justify a modest growth premium relative to the market.

FY2014 set to be another year of double digit profit growth

Looking at other elements of the outlook for the rest of FY2014, the movement of Easter into the second half of easyJet's financial year is expected to have a positive impact on its 2H2014 revenue per seat, which the carrier forecasts will grow at a low single digit rate. It expects cost per seat, ex fuel and currency, to be up around 2% in 2H2014 and 2H fuel costs to be up to GBP10 million higher than last year. It also expects a GBP5 million to GBP10 million positive impact from foreign exchange movements, including those related to fuel.

As before, the key variable in easyJet's guidance seems to be revenue per seat. If easyJet were only to repeat its 1H performance of 1.5% growth in revenue per seat at constant currency, the other elements of its guidance would point to a FY2014 pre-tax profit figure of around GBP570 million. This is almost 20% higher than last year and roughly 10% higher than the figure implied by easyJet's guidance in Jan-2014.

Although, as we have previously observed, it does not look possible to repeat the 50% profit growth achieved last year, both the level of profit and the growth targeted for 2014 demonstrate a business that is performing strongly.

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