Bullish: Stuart Blair
It’s hard to be bullish on easyJet (LSE: EZJ) shares when it continues to deliver bad news. But while I believe that volatility is here to stay for the short term, I feel that there is long-term upside potential. Here’s why.
Firstly, there are signs that international travel is making a comeback. Indeed, easyJet expects capacity this quarter to be 60% of 2019 levels, compared to just 17% in Q3. Further, the health secretary Sajid Javid, has recently indicated that compulsory PCR tests will be abandoned in favour of lateral flow tests. This should open travel up to a significantly larger number of people, and easyJet will be a prime beneficiary.
Secondly, there is the possibility that easyJet may be a takeover target soon. This comes after Wizz Air reportedly approached the airline, with an all-share deal. Although it was reported that this deal “significantly undervalued” the group, and was therefore rejected immediately, it may lead to further bids down the line. Takeovers usually mean that a company is bought for a premium, and therefore, this would likely have a positive effect on the easyJet share price.
Finally, after the recent rights issue, easyJet look financially stable. In fact, although it diluted the share price, the £1.2bn raised means that the company can help expand its services and take market share. I am hoping this could boost long-term profits, and maybe put the company into a position to buy back these shares. Accordingly, although there is no doubt that struggles will remain indefinitely, I feel easyJet is a good long-term recovery stock.
Stuart Blair has no position in easyJet shares.
Bearish: Rupert Hargreaves
Over the past two and a half decades, easyJet has revolutionised the low-cost travel market across Europe. Unfortunately, the company has started to lose market share to more aggressive upstarts such as Wizz Air in recent years. It has also struggled to keep up with its closest competitor, Ryanair.
In 2019, Ryanair flew around 40% more passengers, with a load factor of 96%, compared to easyJet’s 92%. Meanwhile, the average easyJet fare was €61, compared to just €37 for Ryanair.
That was before the pandemic, which blew a hole in easyJet’s balance sheet. The company has had to raise money from investors and cut its operations to the bone to stay afloat.
Now its faces a long struggle to return to growth. The group had planned to invest heavily in its fleet over the next few years, but its options are limited after the pandemic. That might be acceptable if other airlines were in the same position, but they are not. Wizz’s fleet is newer, and it has a more robust, cash-rich balance sheet.
Ryanair also has a stronger balance sheet. It has already announced that it plans to aggressively chase market share over the next few months and years.
Considering these factors, I think easyJet shares will struggle to return to growth in the next few years. That is why I will be avoiding the company. I think the group has had its time in the sun, and it will struggle to maintain its position in the fiercely competitive aviation industry.
Rupert Hargreaves does not have a position in easyJet, Ryanair or Wizz Air.