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The easyJet share price has fallen 60%. I’d consider buying it now

Manika Premsingh
An airplane on a runway

The future of airlines depends on how long it takes to lift the lockdowns and for normal life to resume. They’ve been among the hardest hit shares by the Covid-19-driven stock market crash. As I write, FTSE 100 low-cost airline easyJet (LSE: EZJ) is trading at a share price of 620p. This is almost 60% below the highs seen less than two months ago. Moreover, these levels haven’t been seen since 2012. It’s easy to see why, given that EZJ’s had to seek government support already.

Looking ahead

So how long will it take for the world to return to business as usual? A month ago, I would have said it’s hazardous to try to guess the future. But now we can start making tentative forecasts.

The Chinese experience has given us crucial data to work with. China has lifted the lockdown in Wuhan, which reported the very first coronavirus cases. This has taken approximately two-and-a-half months. The lockdown lift includes resuming flights, albeit with many precautions. If we consider the same timeline for European countries, we are looking at around the end of May to early June before there’s widespread resumption of activity. 

Better times for easyJet?

This is good news for EZJ, whose founder and biggest shareholder, Stelios Haji-Ioannou, has warned that it will run out of cash by August, according to a Reuters report. To avoid that, he said it needs to cancel its order of 107 planes to Airbus. I’m waiting to see what happens on this front. But if I assume the worst-case scenario that it doesn’t cancel the order, then we are looking at EZJ potentially running out of cash in four months. However, if the lockdown lasts only until early June, the airline can conceivably start generating revenues in two months’ time. This could ease things up a bit.

Whether business goes back immediately to pre-coronavirus levels remains to be seen, however. I reckon it will be much slower to start with, for two reasons. One, it’s likely that travel will still be avoided where it can, as a precaution. And two, aviation is a recession-sensitive industry. Going by incoming business trends and nightmarish forecasts for the economy, airlines will continue to feel the drag even after the lockdown is lifted. 

What I’d do now

In sum, easyJet may be able to avoid running out of cash by August if activity resumes before that. But it will still face headwinds from the economic disruption caused by the Covid-19 crisis. If the worst forecasts come true, it may be years before airlines get their act together again.

On the other hand, it has a 25-year history behind it and has been a financially healthy company, which has seen a few recessions. This may be the best time ever to buy its shares and hold them for the long term, especially if activity bounces back quickly enough.

I’d consider buying what I’m prepared to lose on this one given the high-risk environment it’s (not) operating in right now. At the very least, I’d keep it on the radar.

The post The easyJet share price has fallen 60%. I’d consider buying it now appeared first on The Motley Fool UK.

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Manika Premsingh 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.

Motley Fool UK 2020