The airline easyJet (LSE: EZJ) is well known for transporting people long distances, sometimes for a fairly small amount of money. Unfortunately, the easyJet share price has also been travelling a long distance — in the wrong direction. The shares have lost 44% of their value in the past year.
During that period, rivals IAG is down 29% and WIzz Air has tumbled 58%. So easyJet is not alone in its poor share price performance. Still, why has the price tumbled so much and does it now make easyJet a potential bargain for my portfolio?
Revenues and costs
At a simple level, business usually boils down to two sides of an income statement. What are the sales revenues? What does it cost the business to make those sales?
Airlines in general and passenger carriers specifically saw their revenues hit hard by government restrictions and customer sentiment during the pandemic. Some people were not allowed to fly while others decided they no longer wanted to take to the skies. The past several years has seen a gradual return to air travel. In its most recent quarter, for example, easyJet carried 22m passengers. That compares favourably to under 3m passengers in the same quarter last year, although it was still 16% below the pre-pandemic 2019 figures.
But while the revenue side of things has been getting closer to normal, the past year has seen airlines such as easyJet struggling with expenses. Fuel prices have surged, wages are rising fast, and high inflation is adding costs across the industry. Although easyJet hedges much of its fuel needs, rising fuel prices will ultimately feed into higher costs.
That could be bad news for profitability. On top of that, the airline has been seeing extra costs as a result of operational challenges at European airports this summer. In the most recent quarter alone, that added £133m in costs. I think that is all weighing on the easyJet share price.
easyJet outlook
The improving number of passengers is a positive indicator that many people are ready to fly again. There is a risk that any future unforeseen travel restrictions will hurt demand, but the trend is moving in the right direction for now at least.
On top of that, the company has sharpened its commercial focus over the past couple of years, in terms of its operational cost base and ability to generate ancillary revenues from passengers. In the long term, I think that could help profitability.
Costs remain a key issue, though, with high oil prices threatening profitability in the coming years. easyJet has burned through a lot of cash in recent years, meaning it does not have as strong a balance sheet now as it did back in 2019.
My move on the easyJet share price
So, despite the share price fall, I do not see the current easyJet share price as a bargain for my portfolio.
Even though revenues are recovering, the company remains loss-making. In the first half, the reported loss before tax topped half a billion pounds. easyJet is suffering from costs which are largely outside its control, like fuel prices.
I would like to see more signs of financial recovery before even considering airline shares such as easyJet for my portfolio. For now, I am not investing in the carrier.