EasyJet gets uplift from rivals’ woes 

A strong performance for new boss Johan Lundgren in his first quarter as EasyJet benefitted from a combination of Ryanair cancellations and the demise of a trio of peers removing some capacity from the market.

Q1 revenues were up 14.4% to £1,140 million amid an increase of 8% (1.4 million) in passengers carried through the period. This was against capacity growth of 5.5% on EasyJet routes, meaning loads were a lot stronger.

Most pleasingly of all, revenue per seat on a constant currency basis was up 6.6%, slightly better than anticipated by management in November when it suggested this would rise ‘by low to mid-single digits’. On a reported basis, revenue per seat was +8.4%.

Revenues per seat constant currency rose to £55.03 (£55.99 reported), while the headline cost per seat at constant currency was down 3.3% to £53.40 (£54.34 reported). A year ago headline costs per seat exceeded revenues per seat on both a reported and constant currency basis, so this is a noticeable improvement.

Better load factors, which rose by 2.1 percentage points to 92.1%, are also pleasing. We can pin this on slowing capacity growth due to the combination of Ryanair cancellations and the failure of Monarch, Air Berlin and Alitalia. Higher loads and a headline cost per seat that improved 1.6% on a reported basis should be positive for margins in the first half.

In October we noted that EasyJet looks set to benefit from not only Ryanair passengers rebooking over the coming months, but also absorbing the demand on routes from the collapse of Monarch. We suggested this should help with load factors over the winter, with the airline (along with Ryanair) enjoying the biggest complementary route coverage. And so it has turned out, with the 92.1% loads a healthy figure.

Nevertheless, the problems of overcapacity in European short haul combined with pricing pressures (albeit less of a threat than they were a year ago) means it will remain tough going for carriers. EasyJet needs to maintain focus on cost control, which it is achieving at present. The lean programme delivered savings of £28 million in the quarter to offset cost increases relating to weather disruption, industrial action and rising wages.

Another likely margin booster is the performance of ancillaries - in-flight snacks, bags and allocated seating add-ons that push up profits without the need for major investments. Ancillary revenue rose by 20% to £226.3 million, against £188 million last year.

One-off costs from the Air Berlin acquisition are unchanged. Management has previously said it will incur losses of around £60 million relating to these operations in 2018, which it says is down to using wet lease aircraft with lower loads and yields. There are also one-off costs expected of £100 million, all to be absorbed in 2018. But EasyJet says the €40m deal should be earnings accretive by 2019.

The market likes this one, with EZJ up 6% in early trading. 

Dixons Carphone: a new digital era beckons

New leadership for Dixons Carphone in the shape of Shop Direct boss Alex Baldock came as surprise but it's not without good reason. After successfully turning Shop Direct from a catalogue nobody to an online giant, his credentials are impeccable. The task now is to make Dixons Carphone a lean, digital business.

Looking at the results and the clear shift in the retail space we have seen over this peak season, a new boss prepared to slash the vast store estate could be exactly what the company requires.

Christmas sales were good – group revenues were up 4%, rising 6% on a like-for-like basis. This was a very strong performance given the market. The company got a big lift from the iPhone X launch, with mobile sales +8%.  This was a welcome recovery as higher handset costs and a lack of major product refresh cycles has left consumers replacing handsets more slowly. Electricals were just +1%, but the group continues to gain market share in this competitive space.

But profit guidance has been lowered and the group expects headline profit before tax between £365m and £385m, down from previous guidance of £360m to £400m.

As previously flagged, UK margins remain a problem in mobile and there was also a slight reduction in electricals. Due to the lower turnover of handsets, the push to drive sales and retain market share hit profitability in mobile. International sales are very firm, with growth in Nordics of +11% LFL and Greece +23%.

James reiterated the intention to make Carphone Warehouse ‘a simpler, less capital intensive model’.  This almost certainly means store closures. As previously stated, with over 700 Carphone stores in a total estate in excess of 1,000 across the group, there is ample opportunity to rationalise the Carphone estate and improve profitability in mobile while still retaining a dominant market position. Mr Baldock has great experience in turning around Shop Direct and tends to favour an online-first approach – he may cut the store footprint far more radically than Mr James would have done.

Dixons also felt the broader shift in retail trends. In the UK and Ireland, Boxing Day sales failed to match the excitement of Black Friday. It’s clear that retail has changed and retailers must adapt. Those that didn’t take part in Black Friday have suffered. The traditional Boxing Day sales just aren’t what they used to be. Dixons produced a strong Black Friday and that momentum helped.

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