Fuel-efficient Fleets And Digital Trends Will Transform Air Travel

Key Takeaways

• Accelerated fleet upgrades and base expansions could drive faster-than-expected cost reductions, margin gains, and long-term growth beyond current market assumptions.
  
• Strong digital transformation and surging holidays segment position easyJet to achieve greater profit stability and higher ancillary revenue than consensus anticipates.
  
• Regulatory, operational, and demographic challenges, along with lagging digital innovation, threaten easyJet's profitability, growth prospects, and long-term stability against better-adapted competitors.

Catalysts

Operates as a low-cost airline carrier in Europe.

• Analyst consensus expects easyJet's fleet modernization and up-gauging to drive gradual cost per seat reductions, but the scale of scheduled A320neo and A321neo deliveries through 2028-together with more rapid retirement of older A319s than expected-could unlock cost savings and net margin expansion faster, potentially compressing the company's cost base and boosting ROCE ahead of forecasts.
  
• While analysts broadly expect 25% growth in easyJet Holidays customer numbers, management points to strong direct and third-party demand signals and early progress toward higher targets, suggesting the holidays and packaged travel segment may vastly exceed medium-term earnings guidance, resulting in a structurally higher contribution to group profit stability and ancillary revenue than the market currently prices in.
  
• EasyJet's focus on digital transformation, including a fully-owned and replatformed app with accelerated feature rollouts and direct hotel connectivity, dramatically increases its ability to capture higher-margin, digitally native customers as travel continues moving online, which should meaningfully lift revenue per seat and drive sustained improvements in customer loyalty and ancillary yields.
  
• The opening of new bases in under-served European regions-such as Newcastle, Southend, Milan Linate, and Rome Fiumicino-positions easyJet to capitalize disproportionately from intra-EU urbanization and rising regional connectivity needs, supporting long-term passenger volume growth and higher network utilization not yet reflected in consensus forecasts.
  
• The ongoing rationalization and consolidation of the European airline market, coupled with easyJet's enhanced financial flexibility, is likely to confer durable pricing power, allowing sustained increases in revenue per available seat kilometer and structurally higher net margins compared to more fragmented past periods.

easyJet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on easyJet compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming easyJet's revenue will grow by 10.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.3% today to 6.2% in 3 years time.
• The bullish analysts expect earnings to reach £801.6 million (and earnings per share of £1.07) by about September 2028, up from £412.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 8.4x today. This future PE is greater than the current PE for the GB Airlines industry at 6.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.84%, as per the Simply Wall St company report.

easyJet Future Earnings Per Share Growth

Risks

• Intensifying climate change regulations, including potential carbon taxes and restrictions on short-haul air travel in Europe, threaten easyJet's growth prospects and could suppress long-term passenger volumes and revenue.
  
• The company faces over £7.5 billion in capital expenditure for fleet renewal and decarbonization, and if fuel or sustainable aviation fuel costs do not decline as expected, these heavy investments may strain free cash flow and diminish net margins for multiple years.
  
• easyJet's high exposure to UK and European leisure markets makes it vulnerable to demographic headwinds like aging populations and to regional recessions or regulatory shifts linked to Brexit, which could create revenue volatility and compromise earnings stability over the long term.
  
• Supply chain disruptions, such as Airbus delivery delays and potential aircraft or parts shortages, expose easyJet to operational risks and prolong reliance on older, less efficient planes, thereby pressuring unit costs and threatening profitability.
  
• The company acknowledges falling behind its peers in digital innovation and customer experience, and if it continues lagging in this space while industry competitors consolidate or digitize more quickly, erosion of market share may further undermine long-term revenue and earnings.

Valuation

• The assumed bullish price target for easyJet is £8.1, which represents two standard deviations above the consensus price target of £6.59. This valuation is based on what can be assumed as the expectations of easyJet's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.5, and the most bearish reporting a price target of just £5.6.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £12.8 billion, earnings will come to £801.6 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 10.8%.
• Given the current share price of £4.61, the bullish analyst price target of £8.1 is 43.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.