easyJet posts first ever annual loss

easyJet guides the market to a £1.3 billion pre tax loss for the year, after one-offs

Earlier this week, easyJet kicked off the latest quarterly results season with a trading update. Unusually, the company has a financial year which ends in September, so this set of results will be their full year figures. We will have to wait until 17th November for the final numbers, but they gave an advance update on revenue, traffic and a guide for what they expect to report for what will be their first ever annual loss.

They focused on what they call the "headline loss" of between £815 and £845m. That is the full year pre-tax loss before "non-headline" one-off items. They expect those to come in at £440m, giving a total loss of about £1.3 billion.

The one-off items include £120m of restructuring costs, presumably mostly redundancy costs. Back in May, they announced that they planned to make 4,500 redundancies, about 30% of their workforce. That included 727 pilots, which has now reduced to about 60 as a result of a "job-sharing" agreement with their pilots, according to reports.

The rest of the £440m of one-offs is mostly losses on hedging contracts for fuel they had expected to use but now won't need due to the capacity cuts. They booked £164m for that in the first half of the year and added another £145m to bring the total bill for the year to £309m. The fact that they had to take such a big additional charge tells you how much they have reduced their future capacity plans compared to what they had envisaged six months ago.

Traffic and capacity figures

easyJet provided a monthly breakdown of their capacity and passenger numbers for the quarter. These clearly show the recovery over the summer stalling in September as cases began to rise again in Europe and governments responded by imposing quarantine requirements.

September capacity was 38% of "planned", or 41% of last year, down from a peak of 52% in August. They indicated that they would be cutting flying further in the October to December period, intending to fly only 25% of originally planned levels in the face of weakening demand.

What about yields and load factors?

We have already seen that the recovery in passenger numbers has not kept up with the rate at which easyJet added back capacity. That took its toll on load factors in the quarter.

The easyJet results have given us the first real indication of how the pandemic has impacted on yields. Revenue per passenger in the July - September quarter was down, but only slightly at -2.8% compared to last year.

The small decline in yield per passenger, taken together with the much bigger drop in load factors (down by 17 percentage points) gave a drop in revenue per seat of over 20%.

Costs

We don't yet have any detail on the costs for the quarter, but the company does give a figure for total costs for the year, which enables you to calculate what the costs in the quarter must have been. Excluding one-offs, these came in at 53% of 2019 levels, which should be compared to the capacity operated which was 41% of last year. That meant unit costs were up by 30%.

Unit costs up 30% and unit revenues down 20% make for a pretty ghastly combination when it comes to profitability, so how did that look in the quarter?

Profitability

easyJet don't make it easy to track quarterly profits. They report quarterly revenues and also provide figures for both cost per seat and seats, so you can work out the figures. But why they make it so difficult for investors is mystifying to me. It is almost as if the figures tell a story they don't want told.

Let us take a look at what they show. It is not pretty.

The second half of the year is normally where easyJet makes all of its money. The final July to September quarter is usually by far the best, with profits last year in the quarter adding up to £530m. This year, that swung around to a loss (excluding one-off items) of about £315m, pretty much matching the loss they made in the previous quarter, when the airline was effectively grounded.

Management were at pains to emphasise the "very prudent and conservative approach to capacity" that they have taken and that they are "extremely disciplined in focussing on profitable flying". But it is striking that relative to the Q3 baseline, when the airline was grounded, in Q4 they added £603m of additional costs in order to acheive an additional £613m of revenue. It is hard to believe that there wasn't quite a bit of flying in there that didn't cover the incremental costs.

Cash burn

The company reported cash burn of £774m in Q3 and £700m in Q4, so a total of £1.5 billion in the second half.

As usual, the first question to ask is how this is defined, but I haven’t been able to find any such definition.

Net debt went up by £633m in the second half, but that was helped by the £419m they raised through the rights issue. Adjusting for that would give a figure for cash burn of less than £1.1 billion.

Sometimes airline management teams define cash burn to be just the outflow part of the equation, ignoring cash inflows from revenue. Cash costs in the second half were approximately £1 billion and they probably also had about £500m of capital expenditure in the second half based on guidance from earlier this year. So maybe the addition of the two is what they are reporting as cash burn. Perhaps they will explain when they present their full year results next month.

In any case, it is hard to see how the next six months are going to be better than the last six. With only £2.3 billion of cash at the end of September, burning through another £1 - 1.5 billion over the winter will leave them with a dangerously low level of cash by March.

Management emphasise that even after raising £608m through sale and leaseback transactions, 50% of the fleet remains unencumbered. That is down from 68% in March. How much appetite there is for further sale and leasebacks from the increasingly financially stretched leasing companies remains to be seen.

That is probably why Johan Lundgren, easyJet CEO felt the need to include the following statement in the trading update:

Aviation continues to face the most severe threat in its history and the UK Government urgently needs to step up with a bespoke package of measures to ensure airlines are able to support economic recovery when it comes.

Let's hope the government is listening.