EasyJet gets a financial injection and Royal Mail failures exposed by Covid-19

“Any gains made by equities over the last week or so are being wiped out as concern builds over the increase in coronavirus infections in the US,” says Russ Mould, Investment Director at AJ Bell.

“Selling which started in Europe on Wednesday spread to the US overnight, not helped by sickly looking US manufacturing numbers.

Apple’s decision to reintroduce store closures in some US cities seems emblematic of the ongoing struggle with the disease in the world’s largest economy.

“The FTSE 100 dived more than 1% early on with British Airways owner International Consolidated Airlines the top faller.

“As nervousness grows, the record gold price of $1,917 per ounce attained in 2011 may begin to be challenged. Currently the precious metal and traditional safe haven is trading at $1,767.79, enjoying double-digit gains year-to-date.”

EasyJet

“Raising £419 million at only a 5% discount to last night’s closing price is quite an achievement for EasyJet. One might have expected a much greater discount given the large risks to the airline sector this year.

“Prior to the placing, the company had £2.4 billion in cash from a variety of sources including Government and bank loans.

“Topping up this pot with extra cash certainly puts EasyJet in a stronger position as it recommences some flights. Yet should there be another wave of coronavirus and new travel restrictions imposed, EasyJet could see that funding position deteriorate rapidly because its estimated cash burn rate is £1 billion for every three months of full grounding.

“Pictures across the news of a packed Bournemouth beach yesterday would suggest there is an appetite among the public to enjoy themselves with a bit of sand and sea even in a crowded environment. The test for EasyJet is whether this pent-up demand for sun loungers and ice cream will extend to travelling by plane to overseas destinations.

“Anecdotally there seems to be more of an appetite among people to drive to Europe via the Channel Tunnel, enjoying the safety of their own car, rather than sitting among strangers in a metal tube in the sky. Others will have simply written off the idea of going away on a summer holiday this year and have shifted their booking to next summer.

“With coronavirus still omnipresent around the world, it is going to be a very hard slog for EasyJet to start repairing its earnings as customer demand and the length of time that travel restrictions between various countries will stay in place remain so uncertain.”

Royal Mail

“Covid-19 has presented large challenges for lots of businesses for which they could never have adequately prepared but, as Royal Mail admits, in its case the crisis has exposed existing failures in its strategy.

“Fundamentally the company has been too slow to adapt to the shift from letters to parcels. It is possible to imagine an alternate reality where Royal Mail floated in 2013, quickly saw the structural growth opportunity for parcels from online shopping, adapted and invested accordingly and is now a thriving business at the nexus of a rapidly growing e-commerce market. The acceleration in this trend due to the pandemic might even have had a net positive impact.

“Instead, due to issues like poor industrial relations, uneven management and inefficiency, it remains a bit of a dinosaur.

“The recent exit of chief executive Rico Black was an interesting precursor to today’s update and the decision to cut 2,000 management jobs.

“Dividends do not look like being delivered any time soon and the shares are now trading at around half the level from its IPO nearly seven years ago, undermining arguments it was privatised on the cheap at that point.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.