Vaccine market rally fades as US retail sales disappoint – as it happened

Russ Mould of stockbrokers AJ Bell says easyJet’s results make “ugly reading”, and predicts there could be “intense price competition” for flights, as airlines compete for business once Covid-19 restrictions ease.

Mould writes:

EasyJet’s full-year results make for ugly reading and reflect a period where the business and its industry have been turned upside down through no fault of their own.

“Shareholders have suffered a sharp decline in the share price this year and the temporarily cessation of the dividend. Customers have had to contend with cancelled flights and the long road to trying to claim refunds.

“It’s been a miserable experience for everyone involved, including those working for EasyJet, which is making more job cuts, freezing pay and switching some staff to seasonal contracts.

“The recent double dose of good news on the vaccine front from Pfizer and Moderna’s trials certainly gives some hope to society that the world can start to return to normal. Airlines like EasyJet need consumers to feel more confident about being about to move around safely, otherwise few people are going to book plane tickets.

“The late summer pick-up in business was encouraging for the sector but optimism quickly waned when new lockdown restrictions began to be rolled out in various parts of the world.

“Being stuck inside during the autumn and winter periods could fuel pent-up demand for wanting to go on holiday. Once lockdown restrictions start to ease again, a more optimistic consumer may well feel the time is right to book a break away.

“EasyJet needs that event to happen sooner rather than later so cash inflows can start to radically improve. Even when demand picks up, EasyJet faces the prospect of intense price competition in the industry as airlines rush to attract business to aid their recovery.

Adam Vettese, analyst at investment platform eToro, reckons easyJet is well-placed for the recovery, after the “toughest year in aviation history”.

“The situation has been so dire that there will almost certainly be airlines out there at the moment that wonder if they will survive without a swift return to normality.

“However, easyJet is not one of those. Despite posting its first ever loss, it is incredibly bullish about its prospects.

“While its debt has piled up during coronavirus, easyJet has slashed costs, has plenty of access to liquidity and is cherry-picking the flights it knows will make it money while capacity is reduced. For those reasons it is among the strongest of European carriers and therefore will weather this storm better than most.

“And if Pfizer or Moderna get approval for their vaccines, demand for air travel will recover rapidly and I expect to see the share prices of easyJet and other airlines rally.

EasyJet’s staff have also been hit by the pandemic, with the budget airline carrying out a cost efficiency programme that aims to cut headcount costs by up to 30%.

It says:

The restructuring in the UK has already been completed, with agreements having been reached with unions and the affected staff already having left the business. Union or Works Council agreements have now also been finalised in Germany, the Netherlands and Portugal, while discussions have started in other territories.

Agreement has also been reached on a two-year pay freeze across six countries and 10% of our UK crew have already moved to seasonal contracts to operate in the peak months only.

In September, the Evening Standard reported that those seasonal contracts had helped avoid “a mass cull” of pilots, with 60 out of 700 taking voluntary redundancy after the airline closed three bases at Stansted, Southend and Newcastle.

Despite posting a record loss last year, easyJet insists it is “strongly positioned to be a leader in the recovery of the European airline industry”.

It points out that it has raised £3.1bn in liquidity since the pandemic began:

Liquidity raised during the 2020 financial year comprised £400 million from drawing down an existing Revolving Credit Facility, £400 million from two term loans, £600 million from the UK Government’s Covid Corporate Financing Facility, £608 million in sale and leaseback transactions and £409 million in new equity issuance.

Since the end of the financial year sale and leasebacks of a further 30 aircraft have been transacted, raising an additional £717 million.

EasyJet has also reached an agreement to extend its £600m UK government rescue loan, to help it through the winter season. Rather than paying the whole sum in March, it will return half then and half next November.

On the FTSE 250 index, travel company shares are handing back some of yesterday’s gains.

Shares in easyJet have dropped 4% in early trading, while cruise operator Carnival are down 3%. WH Smiths, which runs shops at airports and railway stations, are down 5% while coffee and sandwich bar company SSP have dropped 6%.

Britain’s FTSE 100 index has dipped in early trading, as yesterday’s vaccine euphoria fades.

The blue-chip index has dipped by 24 points, or 0.4%, to 6397 points, having jumped by 104 points on Monday.

Many of yesterday’s top risers are now languishing in the fallers table, with Rolls-Royce down 3.2% and airline group IAG down 2% [they both gained almost 10% yesterday, though].

European markets are subdued too, with the German DAX and French CAC both flat.

After scrambling to buy shares yesterday, investors are more cautious, recognising that the short-term economic, and health, picture is still deeply worrying.

Mohit Kumar of financial services group Jefferies explains:

The vaccine news is a welcome and would change the economic outlook for 2021 and hence the long term central bank reaction function.

But given practical logistics, the outlook will remain dire during the winter months and central banks would need to be there to support the economy.

Richard Hunter, head of markets at interactive investor, has analysed easyJet’s results:

“While the numbers make for predictably ugly reading, easyJet has been agile in reshaping its business where possible.

With the entire fleet grounded for 11 weeks during the initial wave of the pandemic, and with any number of country-specific travelling restrictions limiting recovery since, the effects on the numbers have been severe.

Overall revenues declined by 53%, passenger numbers by 50% and capacity by 47.5%. The effects of the pandemic have also exposed the thin margins on which the airline was operating, and these have unsurprisingly plunged into negative territory, with revenues per seat decreasing by almost 11% to £54.35, and exacerbated by a 21.7% increase in cost per seat to £69.03.

The headline loss of £835 million is within the previously guided range of between £815 and £845 million, while the reported pre-tax loss of £1.27 billion compares with a profit of £430 million in the previous year. Cash burn reduced from the previous quarter’s £774 million, but at £651 million nonetheless remains a constant and significant drain on the company’s resources.

Inevitably easyJet feels unable to give guidance for the forthcoming year in light of the ongoing uncertainty. In the shorter term, it expects to be flying at just 20% of planned capacity for the first quarter of the new financial year, down from the 38% of the fourth quarter as the traditionally quieter winter months kick in, let alone any other restrictions.

Here’s some early reaction to easyJet’s first ever full year loss, from ITV’s Jonathan Swain:

And here’s aviation analyst Alex Macheras:

EasyJet’s CEO Johan Lundgren has told Radio 4’s Today Programme that the vaccine trial results from Pfizer and Moderna are “certainly good news”.

Lundgren says he has written to prime minister Boris Johnson, offering to help roll the vaccine out.

We have the largest fleet of aircraft in the UK, and up to 4,000 people who could help administer a rollout, he says.

Lundgren also reveal that bookings had jumped last Monday (after Pfizer reported that its vaccine had been 90% effective in tests).

Any good news that comes out makes people more confident in making bookings going forward.

But he adds that a vaccine alone isn’t enough for the airline industry - it also needs testing in place, and a “refined development” of the quarantine system to apply only to high-risk areas, Lundgren adds.

“All these things, the vaccine, the testing, and also an evolvement of the quarantine system, I think is necessary to really make sure that demand will come back and the industry will recover.”

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Amid the recent excitement about Covid-19 vaccines, easyJet has this morning reminded us just what a grim year it’s been for the airline industry.

Easyjet has tumbled deep into the red, with a loss of £1.273bn for the last financial year - its first annual loss ever, which shows just how unprecedent the crisis has been. The company made a profit of £430m a year ago, before the coronavirus outbreak forced it to suspend flights or run limited services.

Passenger numbers halved during the 12 months to 30 September, from 96.1 million to 48.1 million, due to the restrictions on travel and quarantine rules imposed during the pandemic. This dragged revenues down by 53%.

EasyJet also cautions that it doesn’t expect to fly more than 20% of planned capacity in the current quarter (October-December) so as to minimise losses.

But, chief executive Johan Lundgren says easyJet’s ready to put on more flights, when circumstances allow:

“While we expect to fly no more than 20% of planned capacity for Q1 2021, maintaining our disciplined approach to cash generative flying over the winter, we retain the flexibility to rapidly ramp up when demand returns.

“We know our customers want to fly with us and underlying demand is strong, as evidenced by the 900% increase in sales in the days following the lifting of quarantine for the Canary Islands in October. We responded with agility adding 180,000 seats within 24 hours to harness the demand.

Last night, the Dow Jones industrial average and the S&P 500 both hit new record highs after Moderna said its vaccine had been 94.5% effective in tests. Earlier in the day, the FTSE 100 hit a five-month high.

Markets are expected to dip back this morning, though, as investors contemplate the rising wave of cases in Europe and America this winter.

As CMC’s Michael Hewson puts it:

Nonetheless the change in outlook and tone has been more than palpable, as pessimism about a Covid exit strategy has transformed into unbridled optimism, that we have a pathway to recovery, and multiple possible vaccine candidates.

This pathway will no doubt contain the odd pothole in the form of setbacks around further trials, and possible concerns about side effects, which may help explain why markets closed down from their intraday peaks.

Despite this unbridled optimism it is also impossible to ignore the current backdrop to the vaccine news, which is seeing a continuation in the trends of rising infection, hospitalisation and mortality rates, across Europe and the US, with California being the latest US state to pull an emergency brake on 41 of its counties, 94% of its population.

The fact remains that for all the optimism over multiple vaccine candidates, none of them will be available to offset the problems currently being faced right now, as we head into a long dark winter of trying to keep a lid on the problems being faced in keeping the virus under control, until the weather warms up next year.

The agenda

• 11am GMT: Bank of England governor Andrew Bailey speaks at The CityUK’s National Conference
• 1.30pm GMT: US retail sales for October
  
• 2.15pm GMT: US industrial production statistics for October
  
• 4pm GMT: ECB president Christine Lagarde speaks at Bloomberg’s New Economy Forum
  
• 5pm GMT: Bank of England deputy governor Dave Ramsden gives a public lecture for University of Nottingham