Can the easyJet share price shake off Russia-Ukraine volatility?

This content has been produced by Opto and was originally published on the Opto Blog.

The easyJet [EZJ.L] share price had been flying high this year, fuelled by optimism that 2022 will bring less turbulence for airline companies.

In the year to 10 February, the short-haul operator's stock had climbed 30.8% thanks to a reduction in losses and guidance that by the end of 2022 business would return to pre-pandemic levels. In the second quarter of this year, easyJet expects capacity to be 70% of what it was in 2019, with a full recovery by the fourth quarter. 

However, the Russian-Ukraine conflict has hurt sentiment, with easyJet stock falling 37.9% since 10 February to close at 484p on 11 March -- a similar trajectory to rival Ryanair [RYA.IR]. Such a fall could represent a buying opportunity for investors, but that will depend on easyJet achieving its targets for the lucrative summer season.

Summer crucial for the easyJet share price

In preparation for a busy summer season, easyJet has added slots at Gatwick, Porto, Lisbon and Linate, and expanded its operational fleet with 25 new aircraft. It has also increased its leisure destination capacity, securing more seats in key markets, including an additional 360,000 in Greece and 477,000 in Turkey compared with its 2019 capacity.

easyJet Holidays, its pre-package holiday business, has sold more holidays for summer 2022 than it had for the entirety of 2019, and is targeting around 1 million passengers for the full year, according to an investor presentation.

"We see a strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity, with UK beach and leisure routes performing particularly well," said chief executive Johan Lundgren.

easyJet's share price has benefitted from improved trading conditions after the pandemic battered the airline sector.  

For the quarter ending 31 December, easyJet's headline losses before tax totalled PS213m, almost halving the PS423m loss in the same period the previous year. Helping reduce losses were an easing of Covid-19 travel restrictions and increased bookings as pre-flight testing requirements came to an end. Cost reduction also played its part with PS512m in savings made during 2021. At the end of the year the carrier had PS4.4bn in liquidity.

Potential headwinds for easyJet

The Russia-Ukraine conflict will be a headwind for the travel industry. Oil prices, which were already on the rise, are at their highest level in 13 years. This will lead to an increase in jet fuel prices. 

Qantas chief executive Alan Joyce has warned that the average fare could increase by 7%, while Lufthansa has already said it would need to increase prices. 

"Unfortunately, if [oil prices] stay at these levels, airfares are going to have to go up," Joyce warned at an Australian Financial Review event. "7% is not massive, but it will have an impact, I think, on some levels of travel."

Jet fuel is typically the largest operational cost for an airline and fluctuating prices can affect the bottom line. To protect themselves, airlines hedge their fuel costs. 

easyJet and Ryanair have said that they were well hedged for any rise in fuel prices, with Ryanair chief executive Michael O'Leary saying "we're insulated for the next 12 months against increases in fuel prices", as reported by Travel Weekly. 

Restrictions on travelling in Europe will continue to mean capacity will remain below pre-pandemic levels, at least for the first few quarters of 2022. Things are improving, however, with restrictions either being eased or lifted in Ireland, Greece, Germany and Iceland in March.

Easter key test for easyJet

Analysts at Liberum believe Easter is a key test for the industry. In a note to investors on 15 February, the brokerage said that it continues to favour easyJet, IAG and Ryanair in the airline space. The analysts remained hopeful that remaining travel restrictions will be "eased appreciably for travel at Easter" with sufficient advance warning to allow people to book with confidence.

According to Hargreaves Lansdown, easyJet's focus on short-haul travel puts it in a better position than long-haul carriers. Leisure travel is likely to benefit from pent up demand following omicron and easyJet could benefit after it added capacity to tourist hotspots such as Greece.

Consumer appetite for travel is also returning. According to research from the European Travel Commission published on 10 February, 61% of Europeans remain optimistic about travelling between January and June this year.

Analysts seem confident in easyJet's future. The carrier carries an average 800p price target from analysts polled by Refinitiv, suggesting a 65.2% upside on the 11 March closing price. Of the 23 analysts offering ratings in March, 17 rated the stock 'buy' or 'outperform'.

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