Airline travel was decimated by the pandemic. Most of the market leaders saw their stock prices slump as flying hours decreased to near zero. easyJet (LSE: EZJ) was no different and saw its stock fall over 60% between February and March 2020.

In 2022, even though flying hours have drastically improved, easyJet shares are still down 41% year-to-date. Over a 12-month time span, the shares have fallen 47%. I think this could be a prime opportunity for me to buy the stock at a beaten-down discount. Let’s explore why.

Encouraging results

In easyJet’s Q3 2022 results, it reported some strong figures. Although the group posted a loss of £114m, it managed £1.7bn in revenue. For context, for the same period in 2021, group revenue was just £213m, highlighting the impressive recovery. Its losses also shrank by £200m from Q3 2021.

Aside from growing revenues, one of the most encouraging metrics I saw was the decrease in debts. The airline sector is notorious for being saddled with high levels of debt after the pandemic, with players like IAG still sitting on over £8.5bn in debt on its balance sheet. easyJet, however, has a modest £200m debt, down from £600m in Mach 2022. With interest rates on the rise, it’s very encouraging to see the group trimming its borrowings.

Global passenger traffic is also still recovering. The airline reported that it’s now operating at 87% of FY19 capacity, which is very reassuring. It’s expected that in 2022, over 3.5bn passengers will board flights, up from just 1.8bn in 2020. This should help easyJet increase its top-line revenues and drive itself back towards profitability.

Not out of the woods yet

There are still a few risks that easyJet must overcome. For starters, the Russia-Ukraine crisis has sent oil prices skyrocketing. Although easyJet has announced that it has 83% hedged fuel for Q4, rising costs are something it will have to contend with in the future. That’s especially so considering inflation is showing no signs of slowing down.

In addition to this, the cost-of-living crisis (also caused by red-hot inflation) means workers are taking strike action. The problem is that if easyJet doesn’t find extra cash for wages, then strikes will continue and operational efficiency will be greatly hindered. However, if it does agree even a small increase in wages, it will have to shell out millions in extra costs as it employs over 13,000 people.

Why I’m buying

For me, easyJet is a prime example of a good quality stock beaten down by Covid-19 and inflation-related market sentiment. It has decreasing debts, rising revenue, and passenger footfall is set to keep rising in the near future and beyond. All of these factors signify to me the stock could surge in the near future. Yes, rising costs still pose a risk, however, the hedged fuel serves to mitigate this in the short term. For those reasons, I’m looking at adding easyJet shares to my portfolio today.

The post I think easyJet shares are about to surge! Here’s why appeared first on The Twelfth Magpie.

More reading

• Could now be the time to buy great UK shares at bargain prices?
• easyJet shares are up 40% in a month. Here’s why
• Up close to 50% in a month, what’s next for the easyJet share price?
• The easyJet share price is up 49% in a month. What on earth’s going on?
• At £5, could the easyJet share price still be a long-term bargain?

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As the travel industry makes a comeback, I would’ve expected airline stocks to take off. So, it’s odd to see easyJet (LSE: EZJ) shares doing so poorly, as it’s down 30% this year. So, here’s why the easyJet share price is crashing.

A dissipating tailwind

On Monday, easyJet released its summer trading update. The good news was that, “Demand for travel has returned“, according to CEO Johan Lundgren. Passenger occupancy for the months of April and May was seven times higher than last year, with expectations for capacity to reach 87% of pre-pandemic levels this quarter. Unfortunately, that’s where the good news ends.

Despite the upbeat tone, investors punished easyJet stock as management lowered its initial guidance. Although 87% capacity of 2019 levels is still high, this is lower than the 90% initially guided. The firm’s outlook for Q4 also saw a decline to 90% of 2019 levels. Additionally, higher operating costs soured investor sentiment even further.

Not so easy

Pent up demand and the lack of airport staff have led to chaos at British airports. Gatwick Airport, easyJet’s base, has announced daily flight caps as a result. This is part of the reason why the FTSE 250 firm has had to lower its guidance, as growth in passenger numbers hit a ceiling.

Gatwick Airport normally operates 900 flights a day in August. But it’s capped its daily operations to 825 flights a day in July, and 850 flights a day in August for this year due to staff shortages. This has led to delays and flight cancellations.

Many analysts are predicting that these delays and cancellations could cost easyJet up to £200m. Nonetheless, management believes that its high frequency network allows for most passengers to be rebooked onto flights within the same day, thus preventing a big loss in revenue.

Turbulence or engine failure?

Whether this chaos will have a devastating impact on the company’s top line will be revealed in its next trading update. What I do know, however, is that the board is bullish about the airline’s long-term growth. It recently announced a mammoth order for 56 Airbus A320neo aircraft, and converted its initial order of 18 A320neos to the bigger A321neos. These aircraft are more fuel efficient and provide bigger capacity. As such, I’m expecting the Gatwick-based firm to reduce its operating expenses in the long term, and reverse its declining profit margins.

That being said, I’m worried about the easyJet share price in the short-term. High fuel costs and rising interest rates present heavy economic headwinds, with analysts bracing for a potential recession. This would undoubtedly impact sales figures.

Fortunately for the firm, it’s got sufficient cash (£3.5bn) to covers its debt (£3.1bn). However, it goes without saying that its debt-to-equity ratio is still disproportionately high, at 126.4%. On that account, another couple of bad quarters may hinder the budget airline’s return towards profitability.

Nevertheless, easyJet’s business model isn’t my cup of tea. Its history of low-quality earnings paired with high levels of uncertainty makes it a risky investment for me, hence why I won’t be investing in easyJet shares. Instead, I’ll be investing in other growth stocks that have better profit margins.

The post Here’s why the easyJet share price is crashing appeared first on The Twelfth Magpie.

More reading

• Could now be the time to buy great UK shares at bargain prices?
• easyJet shares are up 40% in a month. Here’s why
• Up close to 50% in a month, what’s next for the easyJet share price?
• The easyJet share price is up 49% in a month. What on earth’s going on?
• At £5, could the easyJet share price still be a long-term bargain?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.