EasyJet's revenue grows as it reduces costs to tackle weak sterling

EasyJet reported a “solid” first quarter with revenue, costs and passengers numbers in line with expectations, as the budget airline said the effects of weak sterling and fuel prices was worse than it expected.

Passenger numbers rose 8.2% to 17.4m for the quarter ended 31 December 2016, compared to the previous year, driven by an 8.6% growth in capacity to 19.3m seats, while the load factor fell by 0.3 percentage points to 90%.

Revenue climbed 7.2% to £997m reflecting the increase in passengers, but revenue per seat fell 8.2% at constant currency or by 1.2% on a reported basis, to £51.64 per seat. Non-seat revenue rose 19%.

The airline said that revenue per seat trends improved “slightly more” than previously guided due to its network, fares and demand across European markets, despite competitor capacity increases within EasyJet's markets, as well as the impact from the Berlin Christmas market attack.

Chief executive Carolyn McCall, said weak sterling and the impact of fuel combined were £35m worse than previously expected, but EasyJet has made progress in reducing costs in those areas where it has more control such as engineering, maintenance, non-regulated airports and overheads.

During the quarter the airline made £14m in cost savings, through engineering and maintenance, volume-related airport savings and the benefits of ongoing fleet up-gauging, which offset inflationary cost pressure as well as increasing EU 261 claim rates.

Cost per seat, including fuel, grew 2.1% at constant currency, due to low fuel prices and cost control, while cost per seat, excluding fuel, at constant currency increased 1.1%, in line with expectations

Following the referendum vote to leave the EU in June last year, the company reiterated its plans to establish an Air Operator Certificate in another EU country, which would secure flying rights of 30% of its network that remains within and between EU states, excluding Britain. This is expected to cost around £10m over two years with up to £5m incurred in the 2017 financial year.

McCall said: "EasyJet continues to grow with purpose in our core markets with capacity growth of up to 9% across our network. Our focus has been to invest to deliver long term sustainable, profitable growth by strengthening our leading positions at Europe's biggest and most popular airports. The underlying year-on-year revenue per seat trend continues to improve, supported by resilient demand across all our European markets. Forward bookings are ahead of last year."

EasyJet also entered into a sale and leaseback arrangement for 10 A319 aircrafts, which generated $144m. Due to the age of the selected aircraft and related maintenance provision, the company incurred a one-off £16m charge, which was slightly favourable to the £20m expected.

The FTSE 100 company reinforced its balance sheet when it issued a €500m bond at a 1.12% coupon and also extended its $500m revolving credit facility by another year to 2022. At the end of December, the company had £1.33bn in cash and deposits, as well as net cash of £217m.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said that the "dogfight" in European short-haul continues, as the sheer weight of numbers is taking its toll on EasyJet.

"Prices per seat are falling as competitors add capacity, made possible by lower fuel prices. EasyJet is keeping pace and that is helping top line revenue move upwards, with capacity and passenger numbers continuing to surge. However, the group is struggling to keep costs down, partly because its new planes are flying less passengers than the old ones, and that will be eating into margin.

"Financially EasyJet continues to look healthy enough, with net cash on the balance sheet, but there is a serious danger that the short haul market descends into a prolonged slogging match between the various low cost carriers. That wouldn’t be good for profits in the near term.”

Shares in EasyJet were down 9.48% to 973.97p at 1158 GMT.