Stock of the week: EasyJet rebuffs its suitors, for now
EasyJet’s stock price had a horror show last week, falling 10% on Thursday and a further 3.8% at the end of last week after it was announced that it had rebuffed a takeover offer from ultra-low-cost carrier Whizz Air, and would instead engage in a £1.2bn rights issue. The share price is now at its lowest level since September 2020 and has lost all of the reflation-trade gains made after the announcement that a vaccine for Covid-19 would be made available in November 2020. The moral of the story is that, during a crisis for the aviation sector, it costs to be too picky. So, what next for this carrier, and can its share price continue to fall off a cliff?
Why there could be more downside to come
From a technical perspective, the airline could fall further, as share price momentum is on the downside, and it was a negative sign that EasyJet fell sharply for the second day and there were no investors interested in picking up the dip. Added to this, overall market sentiment is likely to hinder any recovery for EasyJet and other airline shares in the medium term in our view. Last week, Delta Airlines said that it would cut capacity to its US routes for Thanksgiving and Christmas due to fears that the ongoing coronavirus would hurt demand. Added to this, last week global stock markets had their worst week since June as renewed concerns about inflation dented market optimism. Just as the airline industry is trying to get back on its feet, ongoing concerns about elevated inflation structures are also a cause of concern for the sector.
Michael O’Leary: speaking truth to the EasyJet board
While the broader picture is looking difficult for the airline sector, there are some unique factors that could impact EasyJet, and short-haul carriers more generally in the future months. At the weekend, Ryanair boss, Michael O’Leary, a major figure in the industry, said that Whizz Air and EasyJet would have to merge, or they would be taken out by other carriers as the airline industry consolidates in the wake of the Covid pandemic. O’Leary said that airlines will need huge scale to survive in the future, and that the fragmented European sector will be unable to survive in the future. While some smaller national carriers in Europe have received huge state aid packages, it is hard to see how this will be sustainable in the long term.
Ryanair not a buyer of its rivals, for now…
O’Leary said that Ryanair was not interested in M&A, at the moment, and that he had made repeated efforts to buy Whizz Air in the past. He also said that he thinks an EasyJet/ Whizz Air merger would make sense as they operate the same fleet, yet they have business in different regions. He did warn that EasyJet’s higher cost model could cause problems for Whizz Air and its lean cost base, however, that is a problem for the future.
Why Easyjet’s share issue could have been an own goal
Short term traders interested in airline stocks should listen to industry giants like O’Leary as he is extremely influential in the sector and his words could have an impact on EasyJet, a FTSE 250 company, and Whizz Air’s share price in the long term. O’Leary’s interview tells us three things:
- Some short-haul, relatively small airlines will not exist in the coming years and there will be airline victims of the Covid crisis.
- Long-haul, large carriers are a safer bet in the longer term, so are those with lower cost bases, for example IAG or Ryanair.
- By failing to mention EasyJet’s huge rights issue, that is an attempt to shore up the company’s balance sheet, it’s a sign that he thinks this is a bad idea that won’t save EasyJet in the long term.
Conclusion: EasyJet’s share price continues to look precarious
These themes, along with other factors including a rising cost base, are a serious threat to EasyJet’s share price. In our view, this suggests that there could be more downside for EasyJet in the coming weeks, and we do not yet see a recovery on the horizon. Even with its rights issue, we could see other suitors make an offer for EasyJet and its valuable airport slots. There is also a good chance that Whizz Air could make another higher offer that may whet the appetite of EasyJet’s board, as potential acquirers tend not to give up on the first attempt. IAG could be another contender to suck up EasyJet into its huge family of carriers. If and when another offer comes in, and as long as it is not rejected outright, that is when EasyJet’s stock price could surge. Until then we believe that there is room for further downside in the coming weeks.
Chart: EasyJet, Whizz Air, Ryanair and IAG
