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EasyJet maintains expectations as it improves cost performance

By Josh White

Date: Thursday 18 Jul 2019

EasyJet maintains expectations as it improves cost performance

(Sharecast News) - EasyJet said it delivered a "robust performance" in its third quarter, it told the market on Thursday, reporting that revenue per seat was positive, including a strong late yield performance which benefited from its revenue initiatives as well as positive ancillary revenue growth and a "solid" Easter performance.
The FTSE 250 low-cost carrier said its cost per seat, excluding fuel, decreased for the quarter as its made progress with its underlying cost and operational performance.

That was mainly driven by the continued focus on operational resilience, which the board said was driving improvements in customer service and "significantly fewer" long and costly delays and cancellations.

Total revenue for the quarter ended 30 June rose 11.4% to £1.76bn, with passenger revenue rising 10.7% to £1.39bn and ancillary revenue improving 14.3% to £374m.

Passenger numbers in the quarter increased 8% to 26.4 million, which the airline said was driven by an increase in capacity of 10% to 28.8 million seats.

Its load factor decreased, as the board had anticipated, by 1.7 percentage points to 91.7%, which it put down to late yield initiatives as well as high prior year comparatives due to industrial action in France, and Monarch's bankruptcy.

Total revenue per seat increased by 0.7% at constant currency, in line with expectations.

EasyJet said that performance was driven by increases due to a "solid" yield performance, supported in particular by the company's focus on initiatives to optimise late yields and capacity discipline by competitors in its markets.

It was also assisted by seasonality, with the movement of Easter to the second half of the financial year having a positive impact of £40m, with the later timing of the Ascension and Pentecost public holidays also having a positive impact on the quarter.

The move to IFRS 15 accounting added a £10m revenue benefit in the third quarter, with the airline also seeing continued growth in ancillary revenue per seat through better bag and allocated seating sales.

That growth was partially offset by headwinds from one-off prior year revenue benefits, including bankruptcies at Monarch and Air Berlin and the impact of French industrial action, as well as a softening of demand due to tougher macroeconomic conditions across Europe, as well as Brexit-related consumer uncertainty in the UK.

A competitive environment and typical new market ramp-up in Berlin also had a negative impact, which EasyJet said was maturing in line with other new bases it had seen, and showing "solid" unit revenue improvement.

The company said its cost performance had been "strong" and in line with expectations, with its headline cost per seat excluding fuel at constant currency falling by 4.0% in the quarter.

That reportedly reflected its investments in operational resilience continuing to drive down costs with lower overall levels of disruption, cancellations and costly delays of more than three hours, as well as wet leasing fewer aircraft, primarily due to the Tegel ramp-up in the period.

EasyJet also saw lower employee incentive payment accruals.

Those improvements were partially offset by ownership costs, reflecting new aircraft deliveries, as well as the annualisation of crew pay deals and better-than-expected crew retention.

The airline said it had improved its on-time performance since the difficult 2018 summer, explaining that despite the air traffic environment remaining challenging, its focus for the summer was on ensuring flight fulfilment and reducing severe delays for its customers.

EasyJet experienced 847 cancellations in the third quarter, compared to 2,606 cancellations in the same period last year, while delays of more than three hours fell by 32% year-on-year, which helped the firm to drive a strong CSAT customer satisfaction score of 72.6% for the quarter.

Looking closer at the load factor, EasyJet said it was slightly lower than the third quarter of 2018, which the board had expected due to high prior-year comparatives and revenue pricing strategies, with passenger growth in line with expectations.

The company's load factor for the quarter was 91.7% with total passenger growth standing at 8% year-on-year, up from 91.1% and down from 8.3% in 2018, respectively.

In preparation for Brexit, EasyJet said it had increased its ownership by qualifying EEA nationals, excluding UK nationals, to 50.6% as at 30 June.

The board said should it be necessary, it had a number of options in place to maintain its ownership by qualifying nationals, including the use of the provisions contained in its Articles of Association which would permit it to suspend rights to attend and vote at meetings of shareholders, or force the sale of shares owned by non-qualifying nationals as well as other potential actions.

Taking a look at its balance sheet, the airline said it was financially "very strong".

During the quarter, it issued a €500m bond under its euro medium term note programme, which was 3.4 times oversubscribed and carried a coupon of 0.875%.

EasyJet's investment grade ratings remained "industry-leading", the board noted, at Baa1 by Moody's and BBB+ by Standard & Poor's.

As part of its focus on driving profit per seat and cash flow, the airline said it planned to grow capacity at the lower end of its historic growth rates in the 2020 financial year, particularly in winter, which included expected fleet growth to reach 332 aircraft by the end of 2019, 349 aircraft by the end of 2020 and 352 aircraft by the end of 2021.

EasyJet also announced on Thursday that Peter Bellew would be joining the company as chief operating officer, and would be a member of the airline management board, reporting to chief executive officer Johan Lundgren.

The board said Bellew was joining the airline from Ryanair, where he had been chief operations officer since December 2017, responsible for all aspects of Ryanair's flight operations.

Looking ahead, for the year ending 30 September 2019 the company expected full-year capacity to grow by around 10%, with second half capacity growing by around 7% - outlooks which were unchanged.

Second half revenue per seat was set to be slightly down at constant currency, with full-year headline cost per seat excluding fuel at constant currency to be down, assuming normal levels of disruption in the fourth quarter, which was also unchanged.

The company's full-year unit fuel bill was likely to be between £30m to £50m to the adverse, with the firm's total fuel bill expected to be around £1.4bn.

Foreign exchange movements were expected to have a £5m adverse impact on headline profit before tax.

The airline said that, with 78% of second half seats sold, it now had better full-year visibility, with headline profit before tax for the 12 months to 30 September expected to be between £400m and £440m, in line with market expectations.

EasyJet said it remained focused on driving future returns, positive free cash flow over the longer term and maximising headline profit per seat, as it continued to deliver value for customers and shareholders.

"WasyJet's third quarter performance was robust and despite the tougher macroeconomic conditions was in line with expectations," said chief executive officer Johan Lundgren.

"Revenue increased by over 11% with RPS increasing through a combination of successful revenue initiatives, a solid Easter performance and a focus on late yield initiatives, with passenger numbers climbing by two million to over 26 million.

"Our customers experienced significantly reduced cancellations and long delays largely as a result of our investment in operational resilience, which also contributed significantly to driving down cost per seat ex fuel at constant currency by 4% in the period."

Lundgren said the company was also "very proud" to win the award for Best Low-Cost Airline in Europe at the Skytrax World Airlines Awards 2019, for the first time in nine years.

"We remain very focused on delivering our revenue initiatives and driving costs down to enhance our profitability per seat.

"With second half forward bookings at 78% we have better visibility on the second half and expect to deliver a profit before tax of between £400 million and £440 million, in line with market expectations."

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