January 08, 2020 - 9:10am EST by
2020 2021
Price: 13.84 EPS 0 0
Shares Out. (in M): 396 P/E 0 0
Market Cap (in $M): 7,200 P/FCF 0 0
Net Debt (in $M): 326 EBIT 0 0
TEV ($): 7,500 TEV/EBIT 0 0

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“It’s the capacity, stupid!”


For the most part, I’d argue that the airline industry (particularly short-haul) operates like most commodity industries.  When times are good, everyone thinks it’ll last forever, and airlines trade at a premium to the value of their fleet. The airlines react by aggressively adding capacity.  Eventually, these capacity additions overwhelm demand, forcing airlines to endure some combination of lower load factors and lower ticket prices, resulting in lower profitability.  Sentiment sours, and airline valuations approach (or even go below) the replacement value of their fleets. Airlines eventually respond to weak profitability by slowing capacity growth.  This of course results in some combination of rising load factors and higher ticket prices, which leads to higher profitability, and the cycle repeats itself.


At the present time, I believe we are in the early innings of the cycle for European short haul carriers.  As I’ll document below, most carriers are meaningfully trimming their capacity growth plans for the next few years.  I expect this to result in continued improvement in European airline profitability/sentiment/valuation from here. Therefore I recommend owning shares of easyJet.


easyJet Company Description:

easyJet is the second largest low-cost carrier (behind Ryanair) in Europe.  Its revenues are split 44% from the UK, 31% from Southern Europe, and 25% from other destinations.  The current fleet is 331 Airbus planes, 70% of which are owned and 30% of which are leased. Net debt is minimal, and the company has no material pension obligations. 


Although easyJet is an LCC, the customer experience is not quite as harsh as Ryanair.  And unlike some of its LCC competitors, easyJet often flies out of 1st-tier, slot constrained airports:

*Data is LTM as of 9/30/19 with exception of SAS (7/31/19)



A Brief History of the European Short Haul Airline Industry from 2005-2019:


Why European Short Haul Airline Profitability Should Improve from Here:

The “Big 5” among intra-European airlines currently control >60% of the market – Lufthansa accounts from ~16% of capacity, Ryanair 15%, IAG 12%, easyJet 11%, and AirFranceKLM 9% (data from IAG 2018 Investor Day Presentation).  How are each of the Big 5 adjusting capacity right now in light of depressed returns?