Since easyJet (OTCQX:ESYJY) started to operate on a regular basis in 1995, the airline managed to be highly successful. But as investors know, past performance is not a real indicator for future performance. Yet, there are 5 reasons to believe that 2016 will be another good year for easyJet.
1. Competitive service out of Belfast
easyJet has its main hub in Belfast since it all started there. The airline's first route led from Belfast to London Luton. This route not only still exists, it is highly profitable. The company is the biggest airline in Northern Ireland and offers service to three London airports - Luton, Gatwick and Stansted, which is Ryanair's (NASDAQ:RYAAY) main hub. No other airline offers service to more London airports out of Belfast than easyJet. How important this single route is for the company (even though it offers now a vast number of pan-European routes) can be seen when looking at its passenger numbers. As The Irish News reported, the airline flew more than 45 million passengers so far between the two cities since 1995. During the last year, the company offered 1.3 million seats on this route alone.
The only airport that Ryanair is servicing from Belfast is London Gatwick. Yet, that will change soon as Ryanair announced plans to return to Belfast with a handful of new routes. As Ryanair frequently stated and still states, its ticket prices are oftentimes even more competitive than easyJet's. This could either lead to a slightly lower load factor on easyJet's planes or to cheaper easyJet tickets resulting in a lower PRASM.
2. Low fuel costs
It might be a pain for some investors to mention it, but yes, low fuel costs let airlines benefit. It is often said that they tend to give this benefit away to customers in the form of lower ticket prices, but aren't easyJet's tickets already low? What might be the case for legacy carriers who need to step up to assumed subsidized Gulf airlines, customers are already positively biased towards low cost airlines since their name suggest low ticket prices. easyJet's passenger numbers, which increased during the last year by 6%, don't suggest that the airline needs to significantly lower its fares. What can eventually lead to lowering of fares is, however, the upcoming competition in Belfast in the mid-term future.
Yet, as Greg Smith ((AFR)) mentioned in his article, the price for crude oil is down by almost 70% compared to 2014. So, even if it recovers a bit in 2016, this should generate some "handy tailwind" for the company as he puts it.
3. Bookings "back to normal"
The airline not only managed to transport 6% more passengers in the last business year (see above), but also reported that "load factors [were] recovering to normal levels". This encouraging outlook (and the overall success of the company) might be the case why the Japanese investment bank Nomura recently rated easyJet's stock a "buy" with a price target of 21 GBP (currently 16 GBP - 21 January 2016). It also means that easyJet might even be able to compensate lower December bookings in its current business year. A big plus for easyJet in this matter may also be that the airline enjoys a rather good image in contrast to the still "rough and cheap" image of Ryanair that the company is eager to change.
4. Feeder service intended
The most promising sector for some investors might be that both easyJet and its main competitor Ryanair intend to provide feeder service to Europe's legacy carriers like Lufthansa, British Airways or Air France-KLM. Although that such feeder contracts might be subject to distant future partnerships, Norwegian Air is currently looking for a feeder for its low-cost long-haul flights. As I showed in my recent article covering Ryanair, liability for delays wouldn't be a major concern since Norwegian would be willing to take it.
Yet, liability for delayed flights isn't the only obstacle for (rather complex) feeder flights, as Tanya Powley from the Financial Times explained: Feeder flights only make sense if they provide a smooth connection for travelers, meaning an easy transfer of their luggage by the airport. If travelers needed to pick up their luggage first and go through security again that would make both tight connections and reasonable durations of the overall travel time impossible. Yet, low-cost airlines are used to fast turnaround times (as fast as 15-20 minutes) which are almost impossible to uphold performing hub service.
The other question is: Are Lufthansa's or British Airways' business class passengers really willing to fly with a low-cost carrier? To make this likely, easyJet would need to fundamentally upgrade its flying experience for business travelers. And investors should also have an eye on Etihad Regional. If Etihad succeeds and experiences a breakthrough, other Gulf carriers will likely follow. And if Gulf carriers successfully manage to operate their own European based regional services under their own brand, they could pose a large threat to low-cost feeding services. On the other hand, analysts like Oliver Sleath (Barclays) see still much room for further growth for low-cost carriers in their original business model.
Yet, it is out of question that the possibility of low-cost feeder services would open a completely new field of growth for easyJet and Ryanair. One thing is for sure: The early bird - may it be easyJet or Ryanair - catches the worm!
What might sound as quite a business adventure will become reality for many Britons this year. Nathan Lowry secured a licence from easyJet for his business called People's Coffee. As BT.com recently reported, he is going to open about 30 shops across the UK within the next 2 to 3 years under the brand of easyCoffee - with the same livery as easyJet, of course. Like easyJet, easyCoffee will be a low-cost coffee chain that offers you highly successful coffee products like cappuccino, latte, espresso and the like, yet in smaller cups than Starbucks (NASDAQ:SBUX) but a lot cheaper as well. Each cup of coffee is set to cost 1 GBP. If easyCoffee manages to become successful, this could mean additional revenue for easyJet through licensing.
What the year 2016 will eventually bring for easyJet no one knows. But due to the aforementioned reasons, it is hard to believe that the airline won't be able to further ameliorate its performance despite growing competition with Ryanair on certain routes.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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