easyJet (LSE: EZJ) shares were relegated to the FTSE 250 at the height of the pandemic. At 572p today, the easyJet share price is still down 55% from 1,270p where it was trading in February 2020. Over the past two years, the airline stock has experienced volatility and attempted breakouts in a tricky environment for the travel industry.
Up 30% since the 2022 low in March, is this another false start for easyJet shares? Or does this mark the start of a sustained rebound to the FTSE 100 index? Let’s explore.
A runway to recovery
With less restrictive coronavirus travel regulations for many of its most popular routes, easyJet looks well placed to capitalise on soaring demand for a summer getaway. The company recently noted that “daily booking volumes for summer [are] currently tracking ahead of those at the same time in FY19“.
easyJet’s financial position is encouraging. The company reduced its net debt from £0.9bn to £0.6bn in the six months ending 31 March 2022. What’s more, easyJet flew 80% of its FY19 capacity in March — up from 50% in January. Additionally, the airline is 64% hedged against the cost of airline fuel for the first half of 2022. This should provide some short-term protection for easyJet shares from rising oil prices.
Admittedly, it flagged six month losses of £535-£565m in its latest trading statement. Nevertheless, a strong summer could signal the end of heavy selling that has depressed the share price recently. With fair winds behind it, the airline could be back in the FTSE 100 index come the June reshuffle. This should boost the shares with additional capital flows from passive investors.
Possible turbulence ahead
Covid-19 continues to cloud the outlook for easyJet stock, despite relaxations in European travel restrictions. In April, up to 20% of staff at some easyJet bases were off work due to coronavirus outbreaks. Consequently, the airline cancelled hundreds of flights in recent weeks. In my view, easyJet can ill afford such disruption in its crucial summer season.
easyJet is only hedged 42% against the cost of jet fuel for the first half of 2023 and 15% for the second half. Should the commodities crisis persist, the easyJet share price could face further pressure if elevated oil prices start to eat into profit margins.
The rising cost of living and Russia’s invasion of Ukraine also pose potential difficulties for the airline industry. However, in my opinion, easyJet’s in a better position than key competitors to confront these challenges. In contrast to IAG, the budget airline is focused on cheaper short-haul flights, and unlike Wizz Air, it operates no flights to Russia or Ukraine.
Should I buy easyJet shares today?
The recovery for easyJet shares is heavily reliant on the airline’s ability to return to normal capacity levels. While it’s difficult to predict the macro developments, at a substantial haircut from its pre-pandemic level, the stock looks fairly valued to me, taking into account the risks it faces.
For me, easyJet looks destined for a return to the FTSE 100 if it has a good summer. This could be a catalyst for a sustained recovery in the share price. Accordingly, I’d buy shares in the airline today while it’s still a FTSE 250 member.
