easyJet: Sky's The Limit

Cross-selling holiday packages (mostly flights + hotel rooms) to EZJ's 90 million captive airline passengers was a strategic no-brainer. This business has posted 47% CAGR in the past 2 years, with +25% customer growth expected in 2025. It has 3 million customers and is already generating EBITDA margins in line with the rest of the group at 15%. Its capital-light nature is a boon to EZJ'S cash flow generation, and it is ahead of schedule in meeting its target of contributing >25% of the group's PBT.

The franchise value of EJZ's low-cost airline revolves around the dominant European short-haul market position in slot-constrained airports (>80% of their capacity), and the valuable 1,100 routes it flies across 35 countries. Testament of its franchise = ~90% of available seats were filled in each of the past 2 years, and prices have held steady (with +1% ticket yields in 2024). Capital allocation holds the key to generating above-industry-average revenue growth. For easyJet, capital allocation comes via increased capacity (+5% p.a. targeted medium-term), which expands its airport network to new destinations and by optimising fleet usage towards better routes. Improved performance in winter reporting periods (1Q and 2Q for it) is real-time proof of its capital allocation skill.

The ongoing upgrade to EZJ's fleet is the key value creation lever for this stock over the medium term. This upgrade entails replacing its ageing A319 planes (1/3 of the current fleet) with more profitable new A320/321 neo aircraft, and is central to EZJ's strategic fleet plan to increase its overall fleet size by 14% by 2028. The upgrade to A320/321 neo aircraft offers increased seat capacity, material fuel efficiencies (+20-30%) and strongly enhanced productivity. The financial upside to EZJ's projects from the A319 planes being replaced is shockingly substantial = increasing the airline's PBT per seat earned by a further GBP 2 or by 50% from the airline's GBP 4.10 of PBT per seat at YE24. These fleet upgrade benefits are expected to become more visible in the 2026 results.

easyJet's holiday's growth and decent capacity growth in 2025

The holiday package business is expected to remain the revenue growth engine within EZJ as the low attachment (connected to airline tickets sold) offers tremendous upside, and it is projecting +25% growth in customers in 2025. In terms of capacity, EZJ is planning for 8% growth in 2025, with a new airport soon to open in Southend, short-haul opportunities in the summer of 2025 in Linate and Rome Fiumicino, and some new winter sun network points in North Africa and the Canaries.

Value creation realized via planned fleet upgrade

easyJet's schedule of airline deliveries/fleet expansion is well mapped out for investors in the fleet plan up to 2028. EZJ projects that this fleet plan has the potential to uplift profits substantially via expanded capacity, higher productivity and improved fuel efficiency. Capacity wise, this plan sees the size of their fleet expanding by 14% and its average seat gauge increasing by 7% from 2024 levels.

Substantial efficiency improvements eventually come through

EZJ's strategic long-term focus is to better leverage its key assets (passengers & fleet) to drive improved margins. The advantage of having a network of Europe's slot-constrained airports is also with a high non-fuel expense base (like airport/ground/crew). easyJet needs to deliver better efficiency (+4-5% point uplift in EBITDA margin) from this network in order to reach its stated GBP 1Billion pre-tax profit target.

EJZ's starting point is fairly decent, being a modest net cash position and with > GBP 2bn of untapped borrowing capacity at its disposal. The forthcoming capex ramp relates to its ambitious plans for fleet upgrade/expansion as its target to own 75% of new planes vs leasing them. Based on current financial performance, this looks like a non-issue for EZJ in 2025 and 2026, as it can probably fund these years through internal funds and existing credit facilities. It is in 2027 and 2028 when new aircraft deliveries significantly ramp up that it will need to crank up cash flow generation levels and tap into further debt funding.

Airlines are viewed as a highly cyclical business, making the sector vulnerable to sharp economic downturns, geopolitical conflicts and global pandemics. The sector frequently gets discounted for any top-down risk that shakes consumer demand or an international or regional-based travel appetite. The airline industry is very exposed to oil/jet fuel price shocks - fuel costs are EJZ's single highest expense line (even with easyJet hedging much of its exposure to this).

The fact that Airbus (and Boeing) are experiencing delivery delays to all the customers is no secret. This is likely to present a challenge to EZJ achieving Phase 1 of its plan to upgrade/increase its fleet size by 15% by 2028 to 395 aircraft. This 2028 phase entails a massive order with Airbus of ~100 NEO family aircraft expected to be delivered in the next 4 years. EZJ is sticking to the 395-plane fleet expectations for 2028 and is optimistic given the back-loaded schedule of expected deliveries (30 in '27 and 43 in '28). Phase 2 of its fleet plan extends out to 2034 and targets a fleet size of 458 aircraft.