EasyJet Drops Most in 6 1/2 Years as First-Half Loss May Double

Jan. 20 (Bloomberg) -- EasyJet Plc tumbled 16 percent, the most in 6 1/2 years, after Europe’s second-biggest discount airline said its first-half loss may double after fuel costs rose and icy weather and strikes caused flights to be canceled.

The pretax loss for the six months to March 31 will be as much as 160 million pounds ($256 million), versus 78.7 million pounds a year earlier, Luton, England-based EasyJet said today.

Disruption from Britain’s coldest December on record and walkouts by air-traffic controllers in France and Spain lifted costs by 18 million pounds and 6 million pounds respectively in the first quarter, wiping 7 million pounds from profit, EasyJet said. First-half kerosene costs may be 30 million pounds higher.

“With oil close to $100 a barrel, fuel is a big, big issue,” said Gert Zonneveld, an analyst at Panmure Gordon in London with a “buy” rating on the stock. “And in the economic climate we’re in it’s more difficult to compensate with price increases, especially while they’re adding seats at such a pace.”

EasyJet fell 73.8 pence to 382 pence, the steepest decline since June 7, 2004, paring the company’s market value to 1.64 billion pounds. The stock has lost 13 percent this year after advancing 25 percent in 2010.

Stelios Haji-Ioannou, EasyJet’s founder and largest shareholder, said separately today that the carrier’s business is “too seasonal for its own good” and that it should not blame the weather “every year.”

Slower Bookings

A slowdown in bookings during the snowy weather and lower- than-expected demand for checked bags, for which EasyJet charges, means reported per-seat revenue will decline by “a couple of percentage points” in the first half, it said. That implies a 4 percent decline in the second quarter, according to Jonathan Wober, an analyst at Societe Generale SA in London.

EasyJet is testing ways of raising more cash from baggage check-in and may vary charges by sector length, Chief Executive Officer Carolyn McCall told analysts. It’s also looking at a propensity for continental travelers to pack heavier carry-on bags, which fly free whatever weight, spokesman Paul Moore said.

Some 59 percent of passengers originated outside Britain in the first quarter, when sales gained 7.5 percent to 654 million pounds, compared with 54 percent a year earlier. Capacity rose 7.7 percent in the three months, led by advances of 32 percent in France, 26 percent in Switzerland and 13 percent in Italy.

Airports also need to boost infrastructure spending after heavy snowfalls in the past two winters, said McCall, whose minimum forecast for the six-month loss is 140 million pounds.

Fuel Hedging

While EasyJet is hedged on 78 percent of its jet-fuel requirement for the fiscal first half, the current market price of $897 a metric ton for the un-hedged portion is 32 percent higher than a year ago, the company said. For the second half, it is covered on only 65 percent of its kerosene needs.

“The economic outlook in Europe remains uncertain and the higher market price of fuel will inevitably put pressure on margins in the short term,” the CEO said in a statement.

Early indications suggest second-half sales “remain robust” and full-year forecasts are “broadly unchanged” assuming no more disruption and excluding the additional fuel costs, EasyJet said.

Founder Stelios, who prefers to be known by his first name, said the carrier’s projected first-half losses indicate it will fail to generate sufficient annual earnings to deliver a targeted 12 percent return on the capital employed to build a fleet in excess of more than 200 aircraft.

Extra Capacity

The investor questioned whether 15 more planes ordered this month can be deployed next winter without losing more money as un-seasonal routes dry up. EasyJet said today it has also extended the leases on three Airbus SAS A319s for a further two years to add summer capacity to leisure destinations.

McCall, who took over in July, aims to lift profit margins by offering flexible tickets to attract business flyers, helping to differentiate EasyJet from Ryanair Holdings Plc and increase competition with network carriers including British Airways Plc. The carrier is “very pleased” with the early performance of the new ticket system, which has exceeded expectations, she said.

McCall also plans to make dividend payments in 2012 for the first time in EasyJet’s 15-year history after net income rose 70 percent to 121.3 million pounds in the 12 months ended Sept. 30, with pretax profit almost tripling to 154 million pounds.

EasyJet has posted a first-half pretax loss for the last eight reporting periods while recovering to record a full-year profit. Spokesman Moore said the company’s October-September fiscal year means that the summer months, always the most profitable for the industry, don’t impact until the second half.

--Editors: Kenneth Wong, Chad Thomas.

To contact the reporter on this story: Chris Jasper in London at cjasper@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

Source : http://www.businessweek.com/news/2011-01-20/easyjet-drops-most-in-6-1-2-years-as-first-half-loss-may-double.html