The easyJet share price (LSE:EZJ) has had a turbulent journey through 2020. After plummeting 70% from high to low, the stock has somewhat recovered in the last few months. But it’s still way below where it was before the March panic-selling spree. Does that mean it’s a cheap deal? Not necessarily.
Flying through cloudy skies
All airlines are facing difficulties beyond anything they could have imagined this year. This is no mere economic crisis. The major problem is coronavirus, but more importantly social distancing. With the exception of Delta, none of the major airlines flying out of the UK, intend to leave seats empty to maintain social distancing on board. This is concerning for passengers. According to a recent report, a third of travellers say they will avoid flying for both leisure and business due to fears of catching coronavirus. The IATA study found that people’s biggest worry was sitting next to someone on the plane who might be infected. If you ask me, this is a pretty valid concern.
But easyJet has its own problems too, notably the stand-off between the board and the founder about the future of the company. The latest incident came on 4 July when founder Sir Stelios Haji-Ioannou called the board ‘dishonest’ over their claims about the company’s finances. The directors have said that the company has been prudently managed through the crisis and is financially secure for the future. The company still has an order placed for 107 new Airbus aircraft, which Haji-Ioannou has been consistently been campaigning for the company to cancel.
Stelios says this is an expense the company cannot afford – and he may be correct. The board has already raised an extra £400m by selling 60m new shares. Haji-Ioannou’s share in the company has been diluted to under 30%. The easyJet share price is now at 664p, around 6% lower than the issue price of the new shares on the 24 June.
What to make of the easyJet share price?
Though shares are selling at more than a 50% discount to March highs, they are certainly no bargain. The landscape has changed for airline companies. Some will make it through, but safety is not assured. It is hard to see how easyJet is better positioned than other airlines for the tough road ahead. Despite the equity sale, the balance sheet still looks precarious.
In my view, easyJet’s future will be determined by how quickly things return to ‘normal’. If social distancing and confidence return all may be well. If not, then it will be hit as hard as others – if not worse. In this imagined future, the board may be required to make yet another equity issuance, further diluting the value of current shareholdings. This is certainly a possibility. Overall, while a strong recovery in the easyJet share price is definitely a possibility, this has not come – in my view – from good management. As such, there are plenty of better places to put your money.
