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Amid all the excitement about a potentially viable vaccine against coronavirus, airline shares like easyJet’s (EZJ) have soared. The real hope of an end in sight to the interminable pandemic and a return to ‘normal’ life - and with it the prospect of people once again hopping on planes to travel abroad for business and leisure - has brought near-hysteria to the beleaguered airlines sector.

For easyJet, the budget airline which has seen its share price decimated by global shutdowns and on-off travel bans, saw its shares shoot up 35%, clawing back most of the losses it has suffered over the course of 2020.

That has undoubtedly been welcome news and brought some much-needed cheer to the airline, but it is important not to get carried away too soon. There is a long way to go before the pandemic is over and the devastating impact on the airline industry can be relegated to history.

We will hear more about that impact when easyJet posts its latest set of full-year results on Tuesday. Then, with no thanks to the coronavirus pandemic for threatening the future of companies in the travel industry everywhere around the world, it will report its first loss in its 25-year history.

EasyJet’s losses have soared to more than £800 million this year. The airline has pencilled in a headline loss before tax of between £815 million and £845 million for the year. It also expects around £440 million of underlying charges, largely relating to the costs of restructuring the business.

To put the loss into perspective, easyJet made a profit before tax of £430 million last year and £445 million the year before that. But then 2020 has been a year like no other, and easyJet has paid the price.

Full-year passenger numbers in the year under review have halved, to 48 million, while capacity has almost halved as well, down 48% to 55 million seats. The latest fourth quarter figures show capacity was still down 38% and only 76.3% of seats were filled. This reduction in passenger numbers has obviously made its mark on the company’s bottomline and the bad news is that there is no sign of it picking up in the near future. EasyJet has already said it expects to fly no more than 20% of planned capacity for the fiscal first quarter of 2021.

But easyJet has not taken this lying down. It has taken drastic steps to reduce costs and that should have paid off. Measures taken include the sale of ten A320 family aircraft for $124.5 million and one A320 family aircraft for cash proceeds of $45 million in cash. It also plans the sale and leaseback of a further 11 aircraft, generating proceeds of $169.5 million.

So far the company’s confirmed it has raised $398.6 million, or about £306 million, having sold and leased a number of its aircraft, leaving it with 141 fully owned and unencumbered aircraft, representing approximately 41% of the fleet.

There are also, of course, those unwelcomed but necessary steps to reduce staff numbers by 30%, with associated costs expected to come in at around £120 million in the second-half. Fuel costs are expected to be around another £720 million.

To put the reduced flying capacity into perspective as well, it is important to remember that airlines typically fare less well during the winter months, so a reduction now may make less of a dent overall than if it were to happen over the peak summer period. Or should I say, happen again. Summer 2020 was obviously a write-off, but all eyes will be on the prospects for the Summer 2021 season when the company reports on Tuesday.

While there have been no broker upgrades for easyJet since the summer, Credit Suisse has upgraded budget airlines to ‘overweight’ on the basis that valuations are low and a vaccine would be a game-changer. However, analysts at Morgan Stanley have, in a note to clients, warned that easyJet, like a number of other airlines, might need more cash to hand in 2021.

More on easyJet

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

UK; Shares

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