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Back in February, the Light jet (LSE: EZJ) share price briefly surged 700p. The budget airline’s stock has since halved, as shambolic airport delays and fears of a recession have sent investors fleeing the aviation sector.
Some of EasyJet’s problems are out of control, but I think some of them are self-inflicted. My guess is that’s why Chief Operating Officer Peter Bellew resigned in early July when flight cancellations and airport disruptions were at their worst.
EasyJet shares are very risky, and it would be easy for me to say I wouldn’t touch them with Bergepole. However, I do not believe this to be true.
In my view, airline stocks definitely have some added risk due to the high debt burden caused by the pandemic. However, the budget airline model is well proven and EasyJet is one of the largest operators in this sector.
I am confident that Orange Airlines will return to profitability and long-term success. I am also encouraged by the appointment of turnaround specialist Stephen Hester as Chairman of the Board.
Mr Hester previously worked at Royal Bank of Scotland (now NatWest Group) and RSA Insurance, which he sold in the contract he took.
Hester is the most respected person in town. I don’t think he’s going to take on this challenge unless he needs to be confident that he can fix EasyJet’s problems and bring the business back to health.
Saving millions on fuel
EasyJet didn’t do everything right this year. But he did score some important victories.
A major victory for the administration was the establishment of a comprehensive oil hedging program. This has allowed EasyJet to buy jet fuel at up to 50% off market prices at times this year. A partial hedge is also available for next year.
The company has made good progress in its activities. CEO Johan Lundgren expects to fly 90% of fleet capacity in the three months to September 30.
Brokers forecast that this late recovery should help lift full-year earnings to £5,566m. This will reduce the group’s net loss to £100m. That’s still a lot of money, but 2021/22 must be. Be the last year of the epidemic losses.
Forecasts for 2022/23 suggest that EasyJet could generate sales of £7,665m and profits of over £250m. That puts the shares at a price-to-earnings ratio of 10, which doesn’t sound like much to me.
EasyJet shares: why buy
The airline still has a long way to go to repair the damage caused by the outbreak and its own mistakes. But I think EasyJet’s shares are probably well-valued today in a long-term perspective.
A short trip to Spain is always more affordable than a fortnight in the Caribbean. I suspect that EasyJet’s large share of the budget short-haul market should help it return to profitability next year, even if the UK is in recession.
EasyJet’s high debt means I only hold this in a small position in my portfolio. But I see the shares as a long-term buy at current levels.