With lockdown restrictions in the UK slowly being eased, the number of holiday bookings has skyrocketed. In fact, easyJet (LSE:EZJ) has reported a significant increase in international travel demand. Its overall booked flights have increased by 337%, and package holiday sales are up by over 600%. Therefore, seeing the easyJet share price take off by 60% over the last 12 months isn’t too surprising.
But can it recover to pre-pandemic levels this year? And should I be adding the business to my portfolio?
The rising EasyJet share price
2020 was a rough time for airline stocks, and easyJet was no exception. Its share price collapsed in late February last year, falling from 1,500p to 494p. That’s nearly a 70% crash in only a few weeks. And it’s understandable. After all, flights were grounded as borders were closed. But while fuel costs might disappear, airport fees and maintenance expenses still need to be paid.
This proved to be particularly problematic, as airline companies don’t tend to have a lot of cash to provide liquidity. And with virtually no revenue flowing into the business, easyJet reported its first-ever annual loss of £1.08bn.
To remain afloat, the management team did two primary things. The first was to borrow a significant amount of money using seven-year bonds that pushed its overall debt level to £3.4bn. The second was to sign an aircraft leaseback agreements as well as sell one of its planes to raise $169.5m (£130.7m) in cash.
Both these money-raising methods can have a long-term impact on the financial health of the business. However, they have also enabled easyJet to survive the pandemic. At least for now. With bookings surging and borders reopening, it seems to me that the worst might have passed. And so I think the easyJet share price can continue to recover. But there are still a few things to consider.
New obligations can restrict progress
The aircraft leaseback agreement undoubtedly helped easyJet strengthen its balance sheet. However, it has also created some potential problems. As a reminder, under these agreements, an airline company sells a plane to a third-party who then immediately leases it back. This provides a lot of cash with no disruptions to operations. But it also introduces an interest equivalent expense that lasts several years.
Let’s assume that easyJet can return to pre-pandemic levels of operations in 2021. In this scenario, it will roughly generate £460m of operating profit. But combining the new interest payments on its additional loans, with the lease expenses of its existing and newly sold aircraft, around £284m of that is being gobbled up.
While affordable, it also means there is limited profit available to pay down debts, reinvest in the business, or return capital to shareholders via dividends/share buybacks.
The bottom line
Despite the increased leverage, in my opinion, easyJet still looks relatively healthy. And with such a sizeable pent-up demand to go on holiday after a year in confinement, I believe the desire for its services is high.
While lockdown restrictions in the UK are slowly being lifted, it’s not the same story for some popular European destinations. Therefore, while possible, I think it’s unlikely that the easyJet share price will fully recover in 2021. But I do believe it will be on track. And so, I would consider adding the stock to my portfolio today.
