Where next for Easyjet’s [EZJ] share price as budget airline fares plummet?

Budget airlines on both sides of the Channel are in for a challenging year as a messy UK-EU divorce exacerbates a low-fare environment that has already depressed earnings.

EasyJet [EZJ] saw its rating cut to “neutral” after JP Morgan Cazenove cited “significant unknowns surrounding Brexit” on 18 January. The company’s earnings estimates suggest a 2019 pretax profit of $747m.Easyjet share price performance, CMC Markets, as at 6 February 2019

JP Morgan, meanwhile, retained “overweight” ratings for its competitors Ryanair [RYA] and Wizz Air [WIZZ], and said that the three airlines would be “long term winners”. However, it slashed price targets for all three stocks.

Ryanair’s share price fell 2.7% to €11.16 on Monday after the budget airline reported a quarterly loss of €20m for Q3 2018, its first since 2014, due to average airfares falling 6% to €30 and Brexit woes impacting consumer spending.

Brexit has been giving low-cost airlines on both sides of the Channel a headache as consumer confidence is being impacted, which is reflected in lower bookings at certain operators. As a result, Wizz Air expects earnings for the three months ending in March 2019 to be at the lower end of guidance, as it already sees passengers postponing bookings till after the UK leaves the EU.

Companies are rushing to revise their shareholder structure to comply with EU competition laws, which require an airline to be majority-owned by EU nationals if it's to operate between destinations within the bloc.

While Wizz Air does have a holding company in Jersey, it's ultimately under Hungarian ownership, meaning that like its peers Ryanair and EasyJet, along with British Airways parent company International Airlines Group, it is struggling to push non-EEA shareholder quotas below 50%. Ryanair has floated a share buyback as a partial solution.

Where next?

29 March is set to be a watershed moment, as consumers and airlines finally get to ascertain what form Brexit has taken. “Once there is certainty around how Brexit will play out, I think consumer confidence will be restored,” József Váradi, CEO of Wizz Air, said.

Some airlines are set to be harder hit than others. While easyJet said that forward bookings after 29 March remain “robust”, Ryanair warned its winter fares could fall by 7%, compared to a previous estimate of 2% – a third revision in three months. Ryanair expects profit for 2019 to be between €1bn and €1.1bn. 

Besides Brexit, airlines will need to navigate the low-fare environment that has been capping their revenues. Ryanair’s CEO Ryan O’Leary said he expects low fuel prices to keep capacity high, which will further weigh down fares.

“Frankly we do not share the optimism” of Ryanair’s rivals around fares for the near-future, O’Leary told investors on Monday. He said he expected capacity to eventually tighten, lifting fares in turn, but warned that might not happen in the next 12-18 months.