We’re used to weakness from easyJet (LSE: EZJ) and the rest of the airline industry. But I doubt many investors expected the events of the last couple of weeks. Certainly not the easyJet share price crash, triggered on 9 September.
That was the day the budget airline announced a new rights issue aimed at raising £1.2bn. On top of that, there’s a new $400m revolving credit facility. Hands up those who thought easyJet would make it through to recovery without needing a big cash injection like this and got it wrong (he says, gingerly raising a palm and hoping nobody notices).
In the company’s words, “raising additional equity will protect and strengthen easyJet’s long-term positioning in the European aviation sector.” Or keep the lights on, whichever angle we might see it from.
But what’s going to happen next? I really think hopes for a quick return to profitable flying were a bit too optimistic in the first half of this year. That’s reasonably apparent from the early recovery in the airline share price and the subsequent fall. But the sharp drop at easyJet has raised a few eyebrows.
Best in sector?
In the week or so since the announcement, the easyJet share price has lost close to 25% of its value. What does that mean in the wider context? Since immediately before the 2020 stock market crash, easyJet shares are down 60%. That’s got to hurt. But it’s significantly less painful than the 78% loss suffered by International Consolidated Airlines shareholders.
Both are hurting from a decline in investor sentiment. And we’ve had further tough news on the recovery front too. This week, Boeing told us it doesn’t expect global aviation to get back to 2019 levels until the “end of 2023, early 2024.” Some optimists had been suggesting we could see things getting back to normal by the end of next year.
At least Boeing reckons short-haul flights will recover the quickest. I feel Boeing is probably thinking mainly of the US domestic market there. But I think the market is still weighted more in easyJet’s favour than IAG’s, with long-haul flying likely to be the last segment to get back to normal.
easyJet share price future?
So back to my question, where will the easyJet share price go next? Well, I can think of easier questions to try to answer. I believe it will take a short while for the market to digest the likely effects of the new cash injection. And to work out whether the cash is going to last long enough. When will flying volumes get back to profitable levels, generating positive cash flow?
My feeling is that this really is the last new cash easyJet will need. And over the next few months, I reckon there’s a good chance investors will reach the same conclusion. If that happens, we could see the easyJet share price rising between now and the end of 2021.
Will I buy? Well no, not now. I’m tempted by the recovery prospects, but I still see huge risk. And I’d need to be able to work out an enterprise valuation once things are closer to normal. Of course, I might be too late then. But there are plenty of other stocks out there for me to buy.