easyJet faces financial setback amid economic challenges

In recent months, easyJet has experienced a volatile share price, largely influenced by geopolitical tensions in the Middle East, particularly stemming from the conflict involving Iran. The company’s share price has demonstrated an inverse correlation with oil prices, given that fuel constitutes a significant portion of easyJet’s costs, accounting for 29.9% of its headline airline EBITDA costs. Concerns regarding potential spikes in oil prices have emerged, particularly following speculative predictions from prominent banks about oil prices reaching $130 per barrel. However, such predictions have not materialized, alleviating some of the immediate pressure on the airline's financial outlook. The geopolitical instability is compounded by Iran's significant reliance on oil exports, with 90% passing through the Strait of Hormuz. Any attempt by Iran to close the strait could lead to severe economic repercussions for the country, threatening the regime’s stability. Historically, previous attempts to close the strait were unsuccessful, particularly during the 1980s, when intervention by the US Navy ensured the safety of shipping lanes. Moreover, the majority of Iran's oil exports are directed towards its allies, primarily China, with the US and Europe sourcing oil from alternative regions. Currently, easyJet has hedged 83% of its oil supply for the second half of the year at a rate of $750 per metric ton, which provides some cushioning against the fluctuations in current market rates. Despite the backdrop of these challenges, easyJet reported solid first-half numbers, with group revenue increasing by 8.1% to £3.53 billion, indicating robust travel demand amid an expanded capacity. This rise is attributed to a 5.4% increase in passenger revenue to £2.16 billion, facilitated by a 7.6% surge in passenger numbers compared to the previous year. Additionally, ancillary revenue reflected a healthy jump of 7.4% to £978 million. However, critics point to the fact that the company’s headline EBITDA has slipped into a loss this year, primarily due to promotional pricing strategies for new leisure routes introduced for the winter season aimed at driving demand. The CEO of easyJet, Kenton Jarvis, stated that excluding the unusual timing of Easter this year, the profit before tax (PBT) would have seen an improvement of about £50 million—an indication that the loss was manageable under normal circumstances. As a result, it appears that the market may have overreacted to the current challenges facing easyJet. Analysts project that easyJet’s EBIT margin is expected to grow substantially, by about 100 basis points by fiscal year 2028, indicating a potential recovery trajectory. Furthermore, key financial metrics such as the EV/EBITDA multiple suggest that easyJet’s shares are significantly undervalued when compared to its industry peers, presenting a compelling investment opportunity as growth in earnings is anticipated at a compound annual growth rate of 16.4% through to 2028.