Expanded European Flights And New Airbus Neos Will Improve Future Profitability

Key Takeaways

• Expansion into major European destinations and new aircraft efficiency initiatives indicate potential for revenue growth and improved net margins.
  
• Competitive unit costs and strong cash flow mitigate inflation and CO2 cost pressures, stabilizing earnings and supporting future growth.
  
• Rising costs from engine issues, CO2 expenses, inflation, and FX losses threaten Aegean Airlines' profitability amid competitive pricing pressures affecting revenue growth.

Catalysts

Operates as an airline company that engages in the provision of public airline transportation services in Greece and internationally.

• The expansion and increased frequency of flights to major European destinations, such as London, Paris, Rome, and others, indicate a potential for higher ticket sales and increased market share, which is likely to boost revenue growth.
  
• The delivery of new Airbus Neo aircraft and JOLCO financing initiatives are expected to enhance fleet efficiency, resulting in cost savings on fuel and maintenance, which may improve net margins.
  
• The development and maturation of Aegean's pilot and technical academies aim to address industry personnel shortages, enhance in-house training capabilities, and potentially improve operational efficiency, benefiting earnings through reduced staffing costs.
  
• Compensation agreements with Pratt & Whitney, although not fully offsetting grounded aircraft costs, provide a financial cushion that could mitigate some of the negative impacts on profitability, thereby stabilizing earnings.
  
• Despite cost pressures from CO2 purchases and inflation, Aegean's competitive unit costs and strong cash generation position it well to maintain profitability and support future growth, positively affecting net margins and cash flow.

Aegean Airlines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aegean Airlines's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 7.8% in 3 years time.
• Analysts expect earnings to reach €162.7 million (and earnings per share of €1.97) by about February 2028, up from €131.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from 7.2x today. This future PE is greater than the current PE for the GB Airlines industry at 7.2x.
• Analysts expect the number of shares outstanding to decline by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.47%, as per the Simply Wall St company report.

Aegean Airlines Future Earnings Per Share Growth

Risks

• Aegean Airlines is experiencing increased costs due to the GTF engine issue, which requires grounding a significant part of their new aircraft fleet. This affects maintenance and aircraft lease costs, potentially impacting net margins and profitability.
  
• The burden of increased CO2 costs, due to the phasing out of free CO2 allowances, is putting additional pressure on Aegean Airlines' operating costs, affecting their net margins.
  
• Inflationary pressures combined with higher flight activity are leading to increased airport handling and overflight expenses, which could impact the airline’s net margins and bottom line.
  
• The valuation effects from unfavorable US dollar exchange rate movements resulted in an FX loss, negatively impacting Aegean Airlines’ earnings compared to the previous year.
  
• Competitive pressures, particularly in pricing, are causing slight reductions in average fares, which could impact Aegean Airlines' revenue growth if the trend continues.

Valuation

• The analysts have a consensus price target of €13.78 for Aegean Airlines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €15.6, and the most bearish reporting a price target of just €11.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.1 billion, earnings will come to €162.7 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of €10.5, the analyst price target of €13.78 is 23.8% 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.