External factors eat into easyJet profits

easyJet has made a trading update – featuring a predicted profit drop of around £200 million – following the end of its financial year on 30 September 2016, prior to the publication of its full year results on 15 November 2016.

The airline reported that in the three months ending 30 September 2016, passenger numbers were a record 22.0 million with a load factor of 93.9%. Revenue per seat at constant currency decreased by 8.7% during the quarter compared with the same period in 2015.

In September 2016, easyJet reported 6,956,654 booked passengers (as opposed to flown passengers as the carrier is a no-refund airline) compared with 6,610,844 in September 2015 – a 5.2% incerase. The load factor in September 2016 was 91.1%, down 2 percentage points from the 93.1% achieved in September 2015.

easyJet said it performed strongly in a difficult operating environment for all European airlines and noted that the three month period was affected by major disruption, exchange rate fluctuations impacting holiday travel costs, the impact on demand from terrorist events and the low cost of fuel continuing to drive increased market capacity.

The exchange rate fluctuations since the UK’s EU referendum result have had a net adverse impact on the company. Foreign exchange rate movements are now expected to have around a £90 million adverse impact compared with the financial year to 30 September 2015, an increase of £35 million since 23 June.

easyJet’s unit fuel bill for the second half of the financial year is expected to decrease by between £75 million and £80 million compared with the six months to 30 September 2015.

On a positive note, easyJet grew capacity by 6.1% in the featured quarter compared with the prior year, continuing to deliver its strategy of enhanced long-term competitive advantage through building leading positions at key airports in its core summer beach routes and its European City network.

Cost per seat excluding fuel at constant currency is expected to decrease by 1.1% for the full year, slightly better than previous guidance. Cost per seat at constant currency including fuel is expected to decrease by 4.6%.

easyJet’s full year profit before tax is expected to be the range of £490 million to £495 million for the year to 30 September 2016. This is considerably lower than the £686 million achieved in the financial year ending 30 September 2015.

The effective tax rate for financial year 2016 will be low double digits, primarily due to the non-cash benefit arising from the recognition of deferred tax liabilities at the recently enacted 17% tax rate, which will have a beneficial impact on earnings per share. easyJet remains committed to declaring a full year dividend based on a payout ratio of 50% of post-tax income.

easyJet expects capacity to grow by around 8% for the financial year (FY) ending 30 September 2017. Approximately 45% of seats are now sold for the FY first quarter ending 31 December 2016, in line with last year. Revenue per seat in the FY first quarter continues to be down year on year and is currently expected to be broadly in line with the reduction seen in the fourth quarter of 2016.

Cost per seat excluding fuel and at constant currency is currently expected to increase by around 1% for the year to 30 September 2017, reflecting increased investment in operational resilience as well as the timing of longer term cost savings. This excludes the impact of a number of aircraft sale and leaseback transactions, plus the one-off costs associated with the set-up of a European AOC and changes to the organisational structure, as well as the outcome of on-going union negotiations.

easyJet says it remains committed to its target of flat unit cost per seat in financial year 2019 against financial year 2015, excluding fuel and at constant currency with normal levels of disruption. The company believes the foreign exchange headwind will continue into 2017 mainly driven by weaker UK Sterling against the US dollar affecting the cost of fuel. The total expected foreign exchange impact for the year to 30 September 2017 is around £90 million.

Carolyn McCall, easyJet chief executive, commented, “easyJet continues to attract record numbers of passengers due to its wide range of destinations, convenient flight times and value for money fares. We have been disproportionately affected by extraordinary events this year. but our excellent network, cost control and revenue initiatives and our strong balance sheet underpin our confidence in the business.

“The current environment is tough for all airlines, but history shows that at times like this the strongest airlines become stronger,” McCall added. “That is why we will continue to invest for the long term success of the business, establishing even stronger market positions, delivering excellent customer service and establishing new revenue opportunities for the future.”

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