Why the easyJet share price slumped 11% in October

The easyJet (LSE: EZJ) share price slumped 11% in October, even though the outlook for the global aviation industry started to improve during the month. 

Recovery underway 

After 16 months of disruption, passengers have been returning to the skies over the past few weeks in greater numbers. While the industry is nowhere near the levels of activity reported in 2019, figures suggest passenger volumes have returned to around 50% of pre-pandemic levels. 

easyJet is also reporting growth. In a trading update published on 12 October, the company declared that the aviation industry recovery “is under way“.

However, alongside this optimistic outlook, the company also said it would report a significant loss of around £1.2bn for its financial year ending in September. This is the second year in a row the corporation’s losses have exceeded £1bn. 

Still, it looks as if customer demand is increasing faster than expected. easyJet is flying 70% of its 2019 schedule in the final quarter of 2021. That is up from 60% initially projected. There is high demand for travel to winter sun destinations. 

So, although easyJet’s outlook is improving, it seems as if the market remains cautious about the company’s prospects. 

easyJet share price risks

I think it is easy to understand why. In the last few days of September, easyJet completed a £1.2bn rights issue. This has helped strengthen the company’s balance sheet, but it also highlights the stresses the pandemic has placed on the group’s finances. 

Further, the rights issue has increased the overall number of shares in the company. Technically, this means each remaining share has a smaller claim on the underlying business and its profits. Therefore, each remaining share is technically worth less than it was before the cash call at the beginning of September. 

I think this is one of the reasons why the easyJet share price fell in October. Each share now has a reduced claim on the underlying business. On top of this, the company is still losing money, and it is unclear how the enterprise will move ahead after the pandemic. 

The airline industry is incredibly competitive. Unfortunately, easyJet’s costs are relatively high. This means it may struggle to offer low-cost deals on a par with peers and remain profitable. Then there are fuel costs to consider. Rising oil prices have pushed fuel costs to multi-year highs across the board. This is only going to make life harder for the group. 

As such, considering these challenges, I would not buy the stock for my portfolio. easyJet’s trading update suggests that the company’s outlook is improving, and some investors may feel comfortable owning the investment as a recovery play.

Nevertheless, the organisation’s weak balance sheet, cost pressures, and the airline industry’s uncertain outlook concern me. Unless the corporation can overcome these pressures, I think the stock could continue to fall. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.