EasyJet (LON:EZJ) recently revealed a whopping 70% drop in profits, spurred mainly by increasing fuel costs and later bookings because of the conflict between Iran and the U.S. The company reported a pre-tax profit of £85 million between April and June compared to £286 million during the prior year period. Although it saw strong demand for late bookings in the month of departure throughout the quarter, the trends proved insufficient to completely offset the weaker booking trends the company is experiencing following the conflict.
The developments come at a time when EasyJet (LON:EZJ) has also attracted takeover interest from U.S. investment firms, suggesting that some sophisticated investors continue to see value in the business despite near-term headwinds. While the fifth bid from Castlelake, worth £5.5 billion, was originally accepted by the company’s board, it then recommended a higher bid from Apollo Global Management, worth £5.7bn, or more than £7 a share. However, the deal is being questioned over a potential EU review of airline ownership.
Despite the drop in profits, easyJet (LON:EZJ) shares hiked more than 5% in early trading on Thursday, partly recouping the 11% fall from the previous day after reports of the EU review.
These trends beg the question: is EasyJet’s (LON:EZJ) profit decline temporary because of geopolitical events, or does it signal a more prolonged profitability problem?
Bull Case
Fuel cost is critical for airlines, and it posed a serious headwind for easyJet with its hike by £105 million compared to the prior year, driven primarily by higher fuel prices on the unhedged portion of consumption. Fuel prices peaked at approximately $1,800 per metric tonne in April.
But could investors be focusing too much on the profit decline and not enough on improving demand trends?
Non-fuel costs for the company performed in line with expectations, with Q3 CASK ex-fuel rising by 3% year-on-year. This performance was stronger when you remove the previous year credit from buying aircraft back.
EasyJet (LON:EZJ) also reported that inflight retail, within ancillary revenue, is continuing to strengthen, with PBT per seat up 14% YoY in the quarter. Other trends that support the bull case for the company include operational performance, which continued to improve from a strong base, with year-to-date on-time performance of 78%, up 2 percentage points year-on-year. Customer satisfaction also further grew to reach 84% for the airline, up 3 percentage points year-on-year, suggesting that the airline is keeping its customers satisfied. EasyJet holidays attained 85%, an increase of 1 percentage point, which exhibits the resilience of the company’s capital-light business model. These trends suggest that customer demand for EasyJet’s (LON:EZJ) services remains resilient despite the company’s near-term profitability pressures.
Bear Case
Despite that, risks remain. The airline’s cost outlook shows that H2 FY26 headline CASK ex fuel is expected to increase by low single digits, and fiscal Q4 FY26 fuel CASK remains uncertain due to price volatility. Geopolitical tensions are also continuing to mount and have yet to find a point of relief, along with fuel prices ticking higher. EasyJet’s (LON:EZJ) outlook for the remainder of its financial year is dependent on “important remaining bookings, as well as fuel prices, which continue to be volatile”, according to the airline.
EasyJet (LON:EZJ), therefore, remains exposed to the unhedged portion of its fuel consumption, which means further increases in oil prices could pressure margins. Consumer spending also remains sensitive to economic uncertainty across Europe, which poses a travel demand risk. EasyJet’s (LON:EZJ) outlook thus remains heavily dependent on consumer booking trends during the remainder of the peak summer season. Management acknowledged that bookings beyond the month of departure still require some pricing incentives, suggesting that travel demand has not fully normalized.
What Investors Should Watch Next
Investors should, thus, continue to watch fuel prices, as they can provide a vantage point for the company’s future operations. Summer travel demand could also prove to be a crucial factor for the airline’s outlook, as its consumer confidence was rising during its peak summer holiday season. Investors should pay close attention to booking trends during the remainder of the summer travel season. Management noted that consumer confidence improved as geopolitical concerns eased and expects August bookings to exceed levels seen at the same time last year. If those expectations materialize, they could provide further support for EasyJet’s (LON:EZJ) outlook despite continued fuel cost volatility.
EasyJet’s (LON:EZJ) 70% profit decline looks alarming at first glance, but improving booking trends, resilient ancillary revenue growth, and management’s optimistic commentary suggest the weakness may be more cyclical than structural. The key question for investors is whether easing geopolitical pressures and strengthening summer demand will be enough to offset continued fuel cost volatility in the quarters ahead.
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