easyjet shares lost 6% this week on the release of their half year results. The airline, like most other similar airlines in Europe, always makes a loss in the winter months due to lower levels of demand at this time of year. What caused the shares to fall was the size of this loss – £212m compared with £21m in the previous year. According to the BBCNews this was due to “seasonality and higher fuel costs”.
So I took a look at easyjet’s presentation to City analysts (here). Seasonality is a feature of this business, so what has made 2016/17 so different? At first sight (slide 5) it was incomprehensible. When compared with 2015/16, passenger numbers were up 9% and even the load factor was slightly up by 0.5%. However, whilst the volume of demand had been maintained, it seems this had only been achieved by lowering price. Revenue per seat was down by 4.9%. But despite this (slide 6) total revenue was up 3.2%. So it would seem that seasonality has not affected profitability at all, as it only affects revenues not costs.
So was the high loss simply due to the increased cost of fuel? Apparently not. Headline costs excluding fuel had gone up 18.7% (slide 6), whereas fuel costs had actually gone down 0.5%. This is not making any sense… There are then three slides (slides 7,8 and 9) that are meant to explain this:
- Slide 7 explains why revenue per seat was down. This was for two reasons. First, Easter was included in the 2015/16 period, but was outside the half year in 2016/17. But this only accounted for less than a third of the difference. The biggest effect was due to “underlying market conditions”.
- Slide 8 explains “headline cost per seat bridge”. This shows that overall these costs were “flat” (i.e. the same) in both periods, except for two things. Fuel costs which were lower, and “P&L Fx” which were higher, and which accounted for the actual higher cost per seat. It seems that P&L Fx is something to do with foreign exchange rate and the value of the pound against the dollar.
- Slide 9 appears to confirm this. But to be honest, this is where I got lost…
Another slide in the presentation caught my eye. This outlined easijet’s key strategic goals (slide 3). One of these was “continued investment in customer proposition and lean initiatives” (my emphasis). Given that this airline is a low cost carrier, it’s whole business model is based around being lean already. So this illustrates how adopting a lean approach is not just a one off activity, it is something that is put in place for the long term. Exactly what easijet’s initiatives are, is explained in slide 26.