Why is EasyJet’s Share Price Lagging IAG and Ryanair?

EasyJet’s share price has consistently lagged both Ryanair’s and IAG’s, despite the low-cost carrier posting record profits this year. This could point to a possible bargain, especially with the aviation industry in full-on recovery mode. Yet there’s some considerations to take into account before investors buckle up.

• EasyJet’s share price down 12% this summer, lagging rivals IAG and Ryanair.
• Shares withstand late-August disruption at UK airports.
• Profits have soared, but easyJet’s share price down 46% over the two-year period.

EasyJet’s [EZJ.L] share price has had a turbulent summer. The stock has fallen around 12.5% since early June: steeper than rival Ryanair’s [RYA.IR] 3.9% drop and in contrast to British Airways-owner (BA) IAG’s [IAG.L] 0.9% gain.

Not helping investor confidence was the fiasco seen at UK airports last week, when around 2,000 flights were cancelled after the National Air Traffic Services limited the number of planes cleared to land.

While easyJet’s share price was able to withstand the turbulence, notching up a 3.5% gain on the week to close at 425p, the disruption was a moment of déjà vu of last summer’s travel chaos.

Already this year wildfires in Europe over the summer and operational issues have forced easyJet to cancel flights, with more cancellations threatening to eat into earnings. Earlier this year, easyJet CEO Johan Lundgren said that “more constrained airspace” had resulted in “unprecedented” air traffic control disruption.

So, while the aviation industry is recovering well from the pandemic, it remains vulnerable to headwinds.

Profits Soar, but EasyJet’s Share Price Lags

EasyJet’s share price has been a perennial underperformer compared to its rivals. Over a two-year period the stock has fallen around 46%, whereas IAG and Ryanair have both gained over the same time period.

Despite the lacklustre share price, profits have boomed. In the three months to 30 June, easyJet reported £203m in pre-tax profits, turning around a £114m loss from the year-ago period. The carrier also said it expects the current quarter — its fiscal fourth quarter (Q4) — to be another record-breaker.

One money-maker for easyJet is ancillary revenue. Things like more baggage allowance, priority boarding and in-flight entertainment all come at an additional cost; luggage in the plane’s hold starts at £6.99 with a £48 fee if you forget to book that space online. In the third quarter, easyJet bagged £23.75m in this type of revenue, up 22% year-on-year.

Average fares have also increased, with revenue per seat up 24% year-on-year in Q3. The rise is partly to offset rising fuel costs, but also partly to take advantage of travellers desperate to travel after two years stuck at home during the pandemic.

All-in-all this helped easyJet to post £2.36bn in Q3 revenue — a 34% year-on-year bump — with promises of record revenues for the current quarter.

But while travellers seem to be willing to fork out for higher-priced tickets and expensive add-ons right now, the nagging concern is that the cost of living could eventually drag on revenue after pent-up demand for foreign travel dissipates.

Is EasyJet’s Share Price a Bargain?

Having started as a low-cost carrier, easyJet has arguably become a middle-of-the road option: it’s not as ruthlessly no-frills as Ryanair or as premium as IAG’s BA. In a cost of living crisis, cash-strapped travellers might decide to go with the cheapest option possible. Another issue is easyJet’s profit margins of 8.6%: IAG boasted margins of 13.1% for the quarter ending June.

Consistent underperformance in easyJet’s share price also makes the carrier vulnerable to a takeover from a bigger rival, especially as it sits on valuable assets in both its stock of planes and its landing slots at Gatwick and Heathrow.

The recent downturn in the stock poses the question: is the stock trading at a discount to its competitors? Record-breaking profits or double-digit share price gains are nothing to be sniffed at — nor are plans to extend easyJet’s roster of destinations, the latest of which is Cairo. EasyJet’s share price has already given shareholders a near 31% return this year.

The next big destination for investors is 12 October, when easyJet’s full-year results land. That should lay out the company’s future flight plan.

Analysts have a 650p price target on easyJet shares. Hitting this would see a 52.9% upside on Friday’s close.