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The airline Light jet (LSE: EZJ) is known for transporting people long distances, sometimes for little money. Unfortunately, EasyJet’s share price is also going a long way – in the wrong direction. The shares have lost 44% of their value in the past year.
At that time, rivals IAG 29% decreased and WIzz air It’s down 58 percent. So EasyJet is not alone in its poor share price performance. Still, why has the price dropped so much and now EasyJet is a potential bargain for my portfolio?
Income and expenses
At the simplest level, a business often boils down the income statement to two sides. What are sales revenues? What will it cost the business to make those sales?
Airlines and passenger carriers in general have seen their revenues hit hard by government restrictions and customer sentiment, especially during the pandemic. Some people were not allowed to fly and others decided they did not want to go to heaven. Over the past several years there has been a gradual return to air travel. In the most recent quarter, for example, EasyJet made 22 million. That’s 16 percent below 2019’s pre-pandemic level, compared to fewer travelers than in the same quarter last year.
But while the revenue side of things is getting closer to normal, the past year has seen airlines like EasyJet struggle with costs. Fuel prices are up, wages are rising fast, and high inflation is driving up costs across the industry. While EasyJet covers most of its fuel needs, rising fuel prices ultimately feed into higher costs.
It could be bad news for profitability. In addition, the airline is facing additional costs this winter due to operational challenges at European airports. In the most recent quarter alone, that cost increased by £133m. I think all of that will weigh on EasyJet’s share price.
The improvement in passenger numbers is a positive indication that more people are ready to fly again. There is a risk that any future unexpected travel restrictions could hurt demand, but the trend is at least now moving in the right direction.
In addition, the company has shown its business focus over the past two years in terms of operating cost base and generating ancillary revenue from passengers. In the long run, I think this can help profitability.
Although high oil prices threaten profitability in the coming years, costs are still a key issue. EasyJet has burned through a lot of cash in recent years, which means it doesn’t have as strong a balance sheet as it did in 2019.
My take on EasyJet’s share price
So, despite the share price decline, I don’t see EasyJet’s current share price as a bargain for my portfolio.
Although revenues are recovering, the company is loss-making. Pre-tax losses rose by half a billion pounds in the first half. EasyJet is suffering from out-of-control costs such as fuel prices.
I would like to see more signs of financial recovery before considering airline stocks like EasyJet for my portfolio. For now, I am not investing in the carrier.