It’s no secret that the pandemic has decimated the travel sector, and easyJet (LSE:EZJ) shares are no exception. The stock had enjoyed a seemingly stellar 2019, only for it to come crashing down the following year.
With Covid-19 forcing governments to close borders, the collapse of easyJet shares in early 2020 is hardly surprising. But today, the situation has improved. With vaccine rollouts making good progress across Europe and new variants being less severe, the number of travellers is back on the rise, as is this stock.
So, will the share price return to its former highs? And how much would I have today if I’d bought £1,000 worth of easyJet shares after it crashed? Let’s explore.
The ongoing recovery of easyJet shares
Between mid-February and the end of March 2020, easyJet shares had collapsed from 1,277p to 443p. That’s a horrifying 65% crash within a few weeks. Since then, the company has managed to start repairing the damage caused by the pandemic.
The first-quarter trading update showed that passenger capacity has recovered to 64% of 2019 levels. Obviously, there’s still a long way to go, but it’s a significant improvement from the 18% level a year prior. Meanwhile, thanks to this increase in traffic and reduced operating cash burn, the headline pre-tax loss came in at £213m for the quarter – a 50% year-on-year reduction.
Needless to say, this is all rather positive. So, it’s no shock that easyJet shares have been trending upward. Today, it’s trading around 674p. Therefore, a £1,000 investment at the end of March 2020 would now be worth around £1,521. And this will likely continue to rise if the business can continue on its current recovery trajectory.
The risks that lie ahead
As encouraging as these latest results are, I still have some concerns about this business. First and foremost is the possibility of a resurgence. Covid-19 has proven its ability to mutate and become more infectious. If a new variant emerges that is more harmful, border closures could once again come into effect, disrupting the company’s recovery progress.
But even if this doesn’t happen, easyJet shares could take several years to return to their former glory due to the weakened balance sheet. With the income stream compromised, management was forced to take out additional loans to keep the lights on at the height of the pandemic.
Consequently, the business now has around £4.4bn of loan obligations on the books. And that’s sent the annual interest bill through the roof. Even if the company fully restores its revenue stream, the bottom line will likely remain depressed due to margin pressure from the increased interest fees.
What’s more, as profits remain in the red, the group’s reliance on debt financing is unlikely to change until cash flows are restored. And while the last of loan maturities for 2022 have been wiped out, the poor level of solvency remains a weak spot for easyJet shares, in my opinion.
The bottom line
All things considered, I’m not tempted to add this business to my portfolio. It’s possible that easyJet shares can make a full recovery over the long term. But personally, I believe there are far better buying opportunities for my portfolio elsewhere.