Why I’m convinced easyJet shares are ready to take off again

The past few years have been a rollercoaster for the aviation sector. Covid-19 caused widespread disruption and a series of unprecedented challenges.

Pandemic-induced travel restrictions hit companies like easyJet (LSE:EZJ) particularly hard. As was the case for its competitors, the budget airline faced grounded fleets, canceled flights, and a significant drop in revenue.

However, amid the ongoing rebound in global travel, it looks to me like easyJet is heading towards much brighter days. To illustrate, at the end of last week, the group announced record fourth-quarter profit amid strong demand.

The company expects pre-tax profit for the fourth quarter to be between £650m and £670m. Moreover, passenger growth looks set to come in at 8% year on year.

Amid a very strong financial performance, increased business momentum has enabled three things to happen that I’m particularly excited about. Let’s take a closer look at each one in turn.

New aircraft order

On the back of the strong trading update, easyJet revealed it has placed an order with Airbus for the purchase of 157 short-haul aircraft for delivery from 2029. On top of this, the deal also includes purchase rights for a further 100 planes.

The $19.9bn agreement brings the total number of planes the airline has on order to 315 by 2034. In my eyes, the move puts easyJet firmly on the front foot by enabling it to secure supply nice and early. In turn, this should position the group well to maintain its industry-leading capacity and route network.

The group’s CEO, Johan Lundgren, claims the deal will facilitate the group’s fleet modernisation and expansion into 2028 and beyond, offering significant advantages such as cost-effectiveness and sustainability enhancements.

Resumption of dividends

Alongside announcing its intention to purchase new aircraft, the group outlined plans to restart dividend payments.

The newly unveiled shareholder returns policy will begin with FY23 and will be payable in early 2024. The initial payout ratio stands at 10% of headline profit after tax, which is anticipated to increase to 20% in FY24.

Although the payout might be modest compared to pre-pandemic times, it facilitates a gradual return to dividends. In my view, this will raise the likelihood of substantial increases in the future.

That said, there are no guarantees when it comes to dividends. After all, their reinstatement depends entirely on easyJet’s good fortunes continuing. And since we’re still in the midst of a cost-of-living crisis, a reduction in the number of bookings can’t be ruled out as customers look for ways to rein in spending.

New medium-term targets

The airline’s new and ambitious medium-term targets reflect its record financial performance this summer.

Among the most significant is the plan to deliver more than £1bn in pre-tax profit, with pre-tax profit per seat of between £7 and £10.

It’s thought this will be achieved by reducing winter losses, ‘upgauging’ the fleet (increasing capacity) and growing easyJet holidays. However, given the sizeable target, I’m not convinced it’ll be that straightforward. That’s why I’d expect more volatility in the short term.

Looking further ahead though, I think it’s pretty clear that the new aircraft order, resumption of dividends and revised medium-term targets are overwhelmingly good news. So if I had some cash to spare, I’d hoover up some shares in a heartbeat.

The post Why I’m convinced easyJet shares are ready to take off again appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)