UK Edition
Questor: Passengers’ flight from ‘quality’ carriers should help easyJet’s shares take off
As Summer getaways begin in earnest – with millions benefiting from competitively priced air travel – now seems a good time to look at easyJet.
The low-cost airline and holiday company saw its share price plunge in the wake of the Brexit vote last year, losing a third in a day to hit £10.20 per share. But it has been steadily climbing since and has reached around £14. This is still below preBrexit levels of more than £15 a share.
This represents an opportunity, says Tristan Chapple, of Phoenix Asset Management. He is one of the managers of the £69m Aurora Investment trust and the Phoenix UK Fund. The trust is a little different to many of its peers in that investments are rarely bought and sold. The average period of ownership is seven years.
Mr Chapple undertakes extensive (and often quirky) research before investing. He has recently taken a small position in easyJet, at around 3pc of the trust, but Mr Chapple said he likes to “creep into” new positions.
He will add to this if it remains cheap and he builds “confidence and comfort” with the company. He bought at £10, but Mr Chapple expects it to reach £22 a share, and thus classes it as “still attractively cheap”.
His reasoning is that easyJet is unfairly presented as a rival to low-cost provider Ryanair, when, instead, it is likely to gain market share from more “quality” carriers, such as British Airways, Air France and Lufthansa.
Mr Chapple and his team spend a long time researching companies and often carry out unorthodox analysis before committing money.
For example, when researching housebuilders such as Bellway and Barratt Developments, he sent mystery shoppers to building sites to look at how many properties had been sold, whether projects were running on time and how much properties were selling for.
For easyJet, Mr Chapple’s complex analysis seeks to work out how much overlap there is between Ryanair’s and easyJet’s routes and potential customer base, in an attempt to work out just how much they are in competition.
Among the roughly 2,600 flights that the two combined operate, just 101 are on the same routes, between the same airports, on the same day. Mr Chapple differentiates between London Stansted and London Gatwick, for example, arguing that people go to the airport nearest to them where possible.
On the basis that travellers are actually more time sensitive than wanting to travel on a particular day, Mr Chapple then looked at the overlap on flights going to and from the same airports within two hours of each other – and the number of overlaps falls to just 14 flights.
These are on popular routes such as Gatwick to Alicante, Spain; or Bristol to Faro, Portugal. This is evidence, he said, that there is minimal competition between the two airlines.
Mr Chapple is impressed by Dame Carolyn McCall, the chief executive. Since she took the helm at easyJet in 2010 she has focused on “slot constrained” airports. This means adding additional flights to popular airports where new airlines have limited ability to operate from.
By comparison Ryanair typically adds routes between new locations or more out-of-town airports. This, said Mr Chapple, is another pointer to the lack of overlap between the two airlines.
Other factors, such as British Airways’ recent cuts to free food and drink, further narrow the gap between easyJet and the higher-end providers, said Mr Chapple, and give a reason why “easyJet will win out in that battle”.
Finally, there is the fall in the share price post-Brexit. Both easyJet and Ryanair fell immediately after the vote, but Ryanair has gone on to far exceed its pre-Brexit share price while easyJet has not.
“There was a huge divergence in the share prices after Brexit and it has remained huge. There is no reason why that should exist,” said Mr Chapple.
He puts it down to the fact that Ryanair is domiciled in Ireland, while easyJet is UK-based and perceived as a UK airline.
In fact, he says, easyJet has more customers that fly with the airline and never touch UK soil than UK customers. He also does not foresee a problem with the airline getting a European operating licence and moving domicile, if needed, post Brexit.
Questor says: buy
Ticker: EZJ
Share price at close: £14.16