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EasyJet hits turbulence as FTSE 100 underperforms

easyJet falls back after announcing rights issue

European markets started the day very much on the back foot today as concerns over the growth outlook and higher prices and wages initially weighed on valuations, with the DAX hitting its lowest levels since 30th July, before rebounding in the aftermath of today’s ECB rate decision, which saw the central bank only modestly slow its PEPP program. 

Europe 

The FTSE100 on the other hand has shown little sign of a similar recovery off its lows, slipping towards the 7,000 level, and while it has recovered a little it is still the worst performing market in Europe today, while both the DAX and CAC40 have returned to positive territory. 

Over the past 24 hours we’ve seen China factory gate prices hit a 13 year high of 9.5% in August, while yesterday’s Fed Beige Book survey showed that US economic activity was decelerating, raising concerns that rising prices and slower growth, will coincide with a slowing of stimulus from global central banks. Energy prices across Europe have also been spiking adding to the uncertain mood.

The travel and leisure sector has been front and centre today after easyJet announced it was looking to raise another £1.2bn from a fully underwritten rights issue, sending the shares sharply down and back to its January lows as shareholders face having to fork out yet more extra cash.

This decision can be looked at in any number of ways, but it appears that management want to be able to ride out what could be a difficult winter for the wider sector, and while they are spinning it as a way to bolster the balance sheet to take advantage of possible expansion plans, it hasn’t gone unnoticed that management also painted a weaker outlook for Q4 and Q1 next year.

The airline said it expects Q4 capacity to increase to 57% of 2019 levels, which is slightly below the 60% it had hoped for in its Q3 update. Looking into Q1 the company says it expects to fly up to 60% of Q1 2019 capacity, which is probably below where it expected to be at the beginning of this year.

This may also help explain why easyJet has decided to raise extra cash now. In true Oliver Twist fashion, having already raised £5.5bn since the start of the pandemic, the raising of another £1.2bn should give it a much better cash buffer. The outlook for airlines continues to be challenging with any sort of back to normal unlikely to come much before Q2 next year, which suggests easyJet may not be the last airline to look at raising extra capital.

It may also help to explain why the rest of the sector is much weaker today as well, with IAG amongst the biggest fallers, as the reality becomes ever clearer that a return to any sort of normal is months away.

In a surprise aside the easyJet also said it had rejected an unsolicited preliminary takeover approach, from a source it declined to name, although it is being reported the counterparty was smaller rival Wizz Air which has a decent presence in Eastern Europe and has been looking to expand the number of routes, particularly in Western Europe where easyJet is strongest.

Morrison’s latest H1 numbers showed comparable sales excluding fuel fell by 0.3%, however putting that to one side and the elevated comparatives from last year, this was still higher than in 2019 by 8.4%.

As far as online sales are concerned the picture was even more positive, higher by 237.1% compared to 2019 and up by 48% to a year ago. While sales were down, revenues were up, rising 3.7% to £9.05bn, however profits were down by 37.1% to £105m, with Covid costs of £41m weighing on the headline number, as well as lost profits from the closure of instore cafes of around £80m.

888 Holdings announced today that it has agreed a deal to acquire the non-US business of William Hill from Caesars Entertainment for £2.2bn., acquiring over 1,400 betting shops and over 2m active customers, with annual revenues of just over £1.2bn.

US

Given today’s initial weakness in European markets, US markets started the day mixed, however another pre-pandemic low in weekly jobless claims of 310k, and an uneventful ECB meeting has changed the mood, with markets moving higher.

Today’s weakness in European airlines hasn’t extended in the same way to US airlines, despite them issuing their own warnings on profits before the opening bell.

United Airlines warned that Q3 capacity would be lower because of the recent Delta variant surge in the US. The airline has seen a deceleration in bookings over the past few weeks, and expects to see a pre-tax loss in Q3, as well as a pre-tax loss in Q4, downgrading its capacity for Q3 to be down 28% from 2019 levels. Previously it was 26%.

Southwest Airlines has also followed suit saying that August bookings were at the lower end of its guidance, with September and October bookings also lower, with September operating revenue expected to decline 25% to 30%.

American Airlines has gone down a similar route also lowering its Q3 guidance.

For the new younger cohort of GameStop shareholders there was more bad news last night as losses widened in Q2, although net sales came in above expectations at $1.18bn, with the shares dropping back sharply.

Shareholders will have to wait for a little while longer for any sign of a return to profit, after losses widened to $0.76c a share. More worryingly revenues were down on Q1, which means it’s not enough to just cut costs to sustain a tired business model, revenues need to increase as well, and they aren’t. Revenues have been in decline since 2018 and are continuing to remain weak. At this rate GameStop will struggle to get close to last year’s revenue numbers, with the company declining to offer guidance for Q3.

On the plus side AMC Entertainment CEO Adam Arons said he had been in touch with GameStop about a possible partnership but then refused to elaborate on what that might be.

FX

The broader rebound in equity markets has seen the US dollar slip back, with the pound the best performer, after yesterday’s comments by Bank of England governor Andrew Bailey that at least 4 MPC members felt conditions had been met for a rate rise, although one wasn’t imminent yet. It certainly makes the next meeting of the central bank on 23rd September, that much more interesting. That meeting will also be the first meeting for new Chief economist Huw Pill and external MPC member Catherine Mann. 

The euro initially edged higher after the ECB announced it was slowing the pace of its monthly PEPP bond buying program, over the next three months, which is currently at €80bn a month. There will be a wider discussion on its future in December, but it was made clear that the number could be moved in either direction if required, pulling it back lower again, and being the worst performer, against the greenback. 

The ensuing press conference from ECB President Christine Lagarde didn’t really add much additional light with the ECB upgrading its inflation forecasts, and upgrading its GDP forecast for 2021, and downgrading it for 2022. 

Commodities

Crude oil prices slipped back after China announced it was releasing oil from its national reserves for the first time, over concern that higher energy prices are driving up factory input prices to unsustainable levels. This morning Chinese factory gate prices hit a thirteen year high at 9.5%, while across Europe energy prices are also hitting record highs.

The move initially had the desired effect pushing Brent prices towards the lows of the week; however, prices quickly rebounded with the downside constrained by the prospect of falling inventories, particularly since output in the US is struggling to recover in the aftermath of Hurricane Ida.

 


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