City Insider: Has easyJet hit a high watermark?

City Insider - FT journalist David Stevenson on the travel industry

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Stand by for more volatile markets, a fresh fall in the oil price and a low-cost fares war, argues City Insider David Stevenson

A shorter note this month which I suppose reflects a simple reality. Markets are a bit boring at the moment because no one quite knows whether:

a) The global economy is about to slide helplessly into recession following a rise in US interest rates; or

b) More likely in my opinion, investors bet the first half of 2016 will be much more exciting.

This slight sense of listlessness doesn’t mean there aren’t any good stories out there.

As I have been predicting for some time we are now entering a final decisive push down in oil prices. Once the $40 barrier is broken for Brent oil, there will be no stopping prices plummeting towards $30 and then $20.

We’re now in what cynical investors call the capitulation game where lots of big corporates and wealthy bond investors have been hanging on waiting for their investment in oil companies to come right as oil stabilises at around $50 a barrel.

Once these investment mugs realise that the game is up and the Saudis want the price much lower to cause maximum short-term damage, these short-termist investors will throw the towel in and sell, sell, sell.

A nasty vortex of bearish sentiment, forced selling and massive negative price momentum will kick in and markets will become even more volatile as the debts mount up.

Lower oil prices should be fantastic news for the big travel businesses and especially good for Thomas Cook which reported its full-year results last week and a first profit for five years, albeit a modest one.

Unfortunately, other events have conspired to cause yet more headaches for the travel giant. Terrorist attacks in Egypt have ruined another key market and I can’t see the geopolitical picture getting better any time soon.

The world’s most-hated organisation IS now realises it can inflict maximum panic and economic damage by relentless depravity, which will encourage it to greater feats of destruction even though it will slowly, relentlessly lose the conventional ground war.

This will unsettle consumers in the West and throttle demand for some long-haul routes.

Within the broader travel sector the expected rebound in demand in the core Northern European markets could also be a tad underwhelming, leaving Thomas Cook struggling to make bumper profits while the sun shines.

The more interesting story, and one almost too good to be true, is at easyJet which announced some remarkable numbers with its full-year results.

On almost every conceivable metric the low cost giant has been powering ahead – total revenues up 3.5%, profits up 18%, pre-tax margins up from 2.8% to 14.6%, passenger volumes up 6% and cost per seat down 3.4%.

It is really very difficult to knock holes in this performance, but I can’t help but think this a high-watermark set of numbers and that dark clouds are gathering in 2016 and beyond.

The oft-repeated concern among institutional investors is that there is trouble ahead as regards capacity.

EasyJet’s numbers tell us how confident it is of late in ramping up capacity. It has immediate plans for 36 new aircraft out to 2021 while it took delivery of 20 Airbus A320s in the 12 months to 30 September 2015.

The commercial imperative behind this is obvious – there is an immediate 7% to 8% saving over equivalent A319 planes. The number of aircraft has increased by 7.4% over the last year and the number of routes just under 9%.

But it’s not only easyJet that has been building for the future – Ryanair is also taking delivery of a veritable armada of new planes, as are Norwegian, Wizz Air and other low-cost competitors.

The inevitable result will be a price-cutting bloodbath at the first hint of a downturn in Europe and especially the UK. And we can already see this force at work.

EasyJet reported its fuel bill will decline by about £150 million next year, but most of that saving will be passed on to the customer.

We’ve also seen costs per seat excluding fuel increase by 2%, owing to a range of factors including higher airport charges.

I’m more than a bit concerned that we have all the conditions for a nasty price war rather in the style of the current supermarket meltdown where once mighty Tesco, Sainsburys and Asda have all been humbled.

To be fair, easyJet and Ryanair are both in fine financial shape, churning out cash and reducing debt levels. Nevertheless, it’s going to be painful.

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