Airlines such as EasyJet (LSE:EZJ) has experienced some share price volatility recently. It rose 3% on Tuesday (March 10), but remains 18% lower than it was 12 months ago. But it is possible FTSE 100 Is sharing going to be a stage for continued recovery?
Analysts expect easyJet shares to rise from current levels. In fact, that is a huge understatement. In fact, the City’s traders expect to rise to the top next year. Seventeen analysts currently have ratings on the budget airline. The average share price target among them is 579.4p, up 43% from current levels of 406.4p.
One analyst is even more bullish, predicting easyJet’s share price to almost double during this period. Their price forecast is 800p, which represents a 97% premium from today. But in the current climate, how true are these estimates?
Going back
As I say, the airline has gone up a lot today in the hopes that the conflicts in the Middle East can end soon. President Trump said on Monday “the war is very complete“, following airstrikes between the US and Israel and Iran in recent weeks.
The conflict has had a major impact on airlines. easyJet has canceled flights to and from Cyprus in recent days, one of the few carriers to experience disruption.
This, however, has not been a major threat to the FTSE 100 company. The threat of higher fuel costs has caused the share price to fall sharply since late February, as the conflict affects the supply of oil. Brent crude has increased during this period, and yesterday touched a four-year high near $120 a barrel.
Are there other risks?
Oil has retreated to around $91, helping easyJet shares recover today. The problem for me, however, is that long-range conflict is still a possibility when airstrikes continue. And it’s not just the problem of rising fuel costs that airline investors have to consider.
Rising crude prices will increase broad-based inflationary pressures, and by adding to consumers’ appetite for luxuries such as international holidays. On the other hand, easyJet may not be hit as hard as other airlines. In fact, its focus on value may support revenue as travelers switch from higher-cost operators. On balance, however, increased inflation is likely to be negative for ticket sales.
Are easyJet shares worth buying?
Developments in the Middle East are particularly worrying as easyJet is already showing signs of trouble. Headline costs rose 13% in the December quarter, which contributed to pre-tax losses widening to £93m from £61m a year earlier.
The good news is that the demand for its airline seats and package holidays remains strong, and the company is increasing the capacity of the flights so that it can monetize them. Revenue rose 11% in Q1. The question is, can sales continue to rise as economic and geopolitical uncertainty increases? And yet, can this solve the problem of rising costs and large operational investments going forward?
On both questions, I’m not so sure. And by extension, I’m not convinced that easyJet’s share price will rise as much as City analysts expect. Many novice investors may want to take a closer look. But I won’t buy an airline with my portfolio.
