EasyJet has seen its share price plunge as it issues two profit warnings in quick succession, while Ryanair too has seen its stock fall amid warnings of tumbling yields.
EasyJet's share price fell by 20% to around 160p ($3) in the wake of a trading update in early June. This came hard on the heels of a 25% decline in May following a bearish outlook with the half- year results to March. The shares were trading at 389p as recently as January, and were trading at more than 500p in early 2002 following its flotation.
The dramatic decline in easyJet's share price has prompted some analysts to speculate that founder Stelios Haji-Iannou may take the company private. Stelios has refused to comment on this possibility, saying that he does not want to rule out any options.
EasyJet's June trading update warns that "while demand for low-cost travel remains strong, the forward pricing environment is exceptionally competitive". Against this background, the airline expects pre-tax profits to "at least exceed" £52 million, prompting analysts to slash their full-year 2004 profit forecasts.
Damian Horth, analyst at broker UBS Warburg, warned in a note to clients that easyJet's profit guidance was "very disappointing" and said that a lack of visibility had led to a 40% reduction in its full- year estimates. "EasyJet's problem right now is that in periods of weak travel demand inefficient airlines take a long time to die. We think there is a clear risk that the demand recovery is insipid and this allows the weak carriers to muddle through the summer and to continue to put pressure on pricing," he warns.
The collapse in share price leaves easyJet with a market capitalisation of around £620-630 million. The airline had £340 million cash at the end of the financial year in March. "We will use our financial strength to protect our leading position," says chief executive Ray Webster. "While this may have a bearing on the growth of our profits this year, it will ensure sound medium- and long-term growth, in a market where there will be fewer carriers."
Ryanair has also seen its share price decline, although the markdown has been less severe than that seen at easyJet. The Irish low-cost carrier's share price has fallen from €7.90 ($9.60) in January to around the €4.50-mark in mid-June, giving a market capitalisation of around €3.38 billion. The carrier warned in January that there was "considerable downward pressure on fares and yields as many loss-making airlines try to compete and survive".
Ryanair is warning that yields will be down by 5-10% over the summer, probably nearer the 5% end of the range, and reiterated its warning that there will be a 10-20% decline over the winter season.
Both easyJet and Ryanair are in the early delivery stages of large aircraft orders. The Irish carrier has taken just over 50 of its 155-strong order for Boeing 737-800s and easyJet by early June had received 18 of the 120 Airbus A319s it ordered in late 2002. Ryanair is looking to cut its capacity growth from an annual rate of 20% to 16% by returning six 737-300s to lessor ILFC. EasyJet says that it will continue to grow by 20%, adding that "capacity deployment is currently under review".
Joe Gill, analyst at Irish stockbroker Goodbody, says: "While easyJet is struggling with yield visibility in the spring and summer, we believe Ryanair is performing well on both costs and revenues." He adds: "In contrast to the conventional wisdom that two carriers will dominate the European low-cost sector, we believe that only Ryanair can manage the challenges inherent in the sector while generating strong profits for shareholders." n
COLIN BAKER LONDON
Source: Airline Business
