I have been pondering over this for the past few months. For obvious reasons. Despite all the progress made in keeping the pandemic under check, the fortunes for travel stocks have hardly improved. It is little wonder then, that in the last year, the easyJet (LSE: EZJ) share price has halved. And it is now at one-third its pre-pandemic levels.
What’s going on with the easyJet share price?
Both the uncertain future of travel and the extent of its share price drop suggest to me that it could be a long while before the easyJet share price returns to its pre-pandemic levels. I was optimistic about the stock last year, and definitely after the stock market rally started in November last year on the development of vaccines.
But the last half year has not been kind to the stock, which has been sliding downwards much of the time. It does not help that a bunch of reasons have come together that could hold it down for longer. The first and most obvious is the Omicron variant, that has necessitated stricter travel restrictions. Even if the restrictions themselves have limited impact on travel, they could still have a sentimental impact on the share price.
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Rising inflation is also problematic because fuel is a big cost for airlines. And according to some forecasters, fuel prices could even touch $100 a barrel by next year. In other words, the company could see rising costs as a time when its revenues are already low, which makes the return to profits that much harder.
Underwhelming results
I also found easyJet’s latest results underwhelming. For the year ending 30 September 2021, the company reported a headline loss before tax of £1.1bn. The loss has increased from last year, even though the pandemic was the most severe in the March-September 2020 period. This is explained by the fact that for the first six months of its financial year (FY) 2020, there was little impact from the pandemic. That is far more than we can say about 2021. I would be willing to overlook this, however, if the future looked better. But for now, I cannot say that it does.
That said, there are some silver linings to this cloud as well. The company expects that winter demand could be strong and by the final quarter of FY-2022, its capacity will be near pre-pandemic levels. According to analysts’ forecasts compiled by the Financial Times, its share price is expected to rise by 32% from current levels as well. Like all forecasts, this could change based on future developments and is not something to rely on.
My takeaway
Keeping this in mind, I still have some hope that easyJet shares might not be a total loss for me if I just hold on to them for a while longer. They still look like a high-risk investment right now, considering how long the pandemic challenge has dragged on, though. I will hold on to them until early 2022, by which time the impact of the winter travel demand should become visible. Only then will I decide what to do next. In the meantime, I will focus on more promising stocks.
