UK Edition
Questor: easyJet’s clever use of data and ability to react to new challenges make it a buy
Questor share tip: the low-cost airline is exploiting pricing anomalies, cutting cancellations and choosing where it expands with care
EasyJet experienced a year of two halves in 2019. The first six months of the year saw the airline’s share price fall by 14pc. This led to its relegation from the FTSE 100 in June.
In the second half shares surged by 49pc to the £14 level at which this column first recommended their purchase in July 2017 and the stock returned to the blue-chip index last month.
Central to the turnaround has been the firm’s increasing use of data, which helped to offset weak market conditions in the first half of the year.
For example, it was able to more effectively capture pricing discrepancies relative to its competitors in super-late bookings. This generated a significant amount of extra revenue, which is likely to grow as easyJet expands its use of price comparison data.
Another benefit of increasing data use is more accurate predictive aircraft maintenance. This facilitates early intervention in potential mechanical faults across the company’s fleet and has contributed to a 46pc fall in cancellations in the past 12 months.
Improved service is being complemented by cost reductions, which amounted to £139m last year as the company sought to offset a 4.3pc increase in fuel cost per seat. EasyJet expects to make further savings of £80m in 2020 as it benefits from the economies of scale produced by its continued expansion into slot-constrained primary airports.
This has been a long-standing focus for the business and has led to a 66pc increase in the number of airports at which it has a dominant position since 2012. It has identified a range of target airports at which it will seek to expand its presence. Many have a weak dominant incumbent airline yet are forecast to deliver strong growth in passenger volumes.
EasyJet is seeking to expand not only the number of routes it offers, it has recently relaunched its holiday offering, which could provide cross-selling opportunities. For example, just 2.5pc of its airline passengers booked accommodation with the company in 2019.
Since the European package holidays market is worth £61bn a year, Questor thinks this represents an extensive growth opportunity in return for a modest initial investment.
The company is also seeking to capitalise on an ongoing shift in attitudes among consumers concerning the environment. It started to offset the carbon emissions from the fuel used in all its flights in November, and in doing so became the world’s first major carbon-neutral airline.
Since 60pc of British adults think reducing emissions should be a priority for the aviation industry, easyJet’s ongoing work with companies such as Rolls-Royce on new technologies to reduce the environmental impact of its operations could resonate with consumers.
- Sign up to our new City Intelligence newsletter for incisive comment on the day's biggest business stories
- Sign up to the Telegraph's Questor WhatsApp group for daily alerts and exclusive audio updates
- Read Questor’s rules of investment before you follow our tips
Confidence among British consumers increased sharply in December. Their view of the economy’s prospects over the next 12 months improved at the fastest rate recorded since before the EU referendum. This suggests that greater clarity on Brexit following the election could benefit the travel industry.
Despite this, easyJet has made extensive plans for a no-deal Brexit, which could prepare it for continued political risk in 2020. It has also instituted an operational resilience programme that aims to cope with an uncertain air traffic control environment across Europe, which is expected to persist in the short run.
Questor thinks these risks, alongside a forthcoming quarterly trading update, could contribute to volatility in the share price. EasyJet is therefore likely to remain at the riskier end of the investment spectrum in 2020.
However, its response to the difficulties it faced in 2019 shows that it has the capacity to adapt to changing operating conditions. After a year of two halves, easyJet’s price-to-earnings ratio of 16 suggests that it is in a strong position to deliver capital growth as it implements an evolving strategy.
Questor says: risky buy
Ticker: EZJ
Share price at close: £13.53
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.