Rising Costs And Delays Will Erode Margins But Allow Recovery

Key Takeaways

• easyJet's focus on affordable travel and digital initiatives drives growth, but aging demographics and seasonality threaten long-term revenue and margin stability.
  
• Regulatory, cost, and competitive pressures-including emissions compliance and limited service diversification-pose ongoing risks to profitability and market share.
  
• Regulatory pressures, fleet challenges, spending demands, and competition threaten easyJet's cost structure, revenue stability, and ability to grow profitably or maintain shareholder returns.

Catalysts

Operates as a low-cost airline carrier in Europe.

• While easyJet is seeing strong demand for affordable leisure travel and has been able to drive higher passenger volumes and ancillary revenues, the company faces mounting societal and regulatory pressure to reduce carbon emissions, which may elevate long-term compliance and operating costs, potentially weighing on net margins.
  
• Although investments in digital platforms and a replatformed app should benefit direct-to-consumer sales and reduce distribution costs over time, easyJet remains highly dependent on a younger, budget-conscious demographic for revenue growth, and demographic shifts toward an aging European population could restrict the future pool of core customers, limiting long-term top-line expansion.
  
• While easyJet is growing its easyJet holidays business and expanding its European short-haul network to capture the rising urban and middle-class market, the company is structurally exposed to the highly seasonal nature of European leisure travel. This makes revenue and earnings susceptible to off-peak demand shocks and volatility, challenging the company's ability to deliver sustainable bottom-line growth.
  
• Despite easyJet's ongoing fleet modernization-expected to unlock significant cost per seat benefits and bolster competitiveness through 2028-delays in aircraft deliveries and persistent inflation in maintenance and skilled labor costs could undermine these cost efficiencies, putting continued pressure on net margins.
  
• While secular passenger growth and digital adoption support future market share gains, easyJet's limited premium product and lack of diversification outside short-haul, low-cost segments means it could face increasing competition both from ultra-low-cost and full-service carriers. This structural limitation may cap yield growth and compress profitability, especially as industry consolidation intensifies.

easyJet Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on easyJet compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming easyJet's revenue will grow by 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.3% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach £598.9 million (and earnings per share of £0.79) by about July 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 bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the GB Airlines industry at 7.3x.
• 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 10.63%, as per the Simply Wall St company report.

easyJet Future Earnings Per Share Growth

Risks

• Growing pressure to comply with stricter environmental regulations and potential legal actions concerning ancillary fees, such as charges for wheelie bags, could increase operating costs and limit the ability to drive ancillary revenues, negatively impacting profit margins and overall earnings.
  
• Prolonged delays in aircraft deliveries from manufacturers such as Airbus have required easyJet to extend leases on older, less efficient aircraft, leading to higher maintenance expenses and less progress in reducing unit operating costs, which may suppress net margins over the medium term.
  
• Dependence on aggressive capacity investments and the need for price stimulation on new routes, particularly during winter and in markets with late approval (like Rome and Linate), raises the risk of persistently weak yields and elevated losses outside peak travel periods, potentially resulting in continued revenue volatility and pressure on earnings.
  
• Exposure to significant capital expenditure for fleet modernization (£7.5 billion CapEx planned in coming years) while trying to maintain robust liquidity and dividend policies may restrict flexibility in responding to economic shocks or underperformance, and could pressure future free cash flow and returns to shareholders.
  
• Intense competition from both ultra-low-cost carriers and full-service airlines in core city markets, combined with easyJet's lack of a comprehensive loyalty program and limited premium offerings, places constraints on pricing power and customer retention, jeopardizing future revenue growth and the ability to expand net margins.

Valuation

• The assumed bearish price target for easyJet is £5.6, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £9.0, and the most bearish reporting a price target of just £5.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £11.6 billion, earnings will come to £598.9 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 10.6%.
• Given the current share price of £4.96, the bearish analyst price target of £5.6 is 11.5% 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.