easyJet: Opportunity to attack the Legacies
September 2021
EasyJet received £1.2bn of funding from September’s fully-underwritten rights issue, following its rejection of Wizzair’s takeover offer, putting it in a position to refine and implement its own post-Covid opportunities as the market opening accelerates.
In theory, a merger between Wizzair and easyJet would have been an intriguing proposition — mostly complementary networks, Wizzair’s cost discipline and easyJet’s superior product, A320 NEO fleet compatibility. But the price offered might have been too opportunistic, or there was a conflict over where the HQ would be and who would be in it, or easyJet genuinely believed that it could do better on its own.
easyJet’s strategy has always seemed slightly fuzzy compared to the sharp edges presented by Michael O’Leary at Ryanair and Josef Varadi at Wizzair. However, presentations made by CEO Johan Lundgren prior to the rights issues point towards a stronger position for the airline in the intra-European market, although initial reaction by investors shows no narrowing in the divergence between easyJet’s valuation and that of the other two LCCs — see chart. The company’s target is to restore EBITDA margins to 15%, which may be a deliberate underestimate — equity analysts are hoping for 18-20% margins.
The Covid depression has enabled easyJet to make costs saving and introduce higher labour productivity. In 2021 it achieved £500m of savings but only half of this amount is regarded as sustainable. Nevertheless, £250m of savings would reduce easyJet’s non-fuel operating costs by almost 6% (2019 comparison).
The pricing environment in Europe, post-pandemic, is likely to be much firmer than before because so much capacity has been withdrawn through bankruptcies and network rationalisations. Both Michael O’Leary and Carsten Spohr, CEO of Lufthansa, agree on the inevitability of significantly higher fares. All airlines should benefit from this development but easyJet is particularly well positioned because its brand is generally well regarded by passengers — according to its own research, it is the first choice lower cost airline in the UK, France, Switzerland and Berlin (what the rest of Germany thinks was not revealed).
The most interesting “growth opportunity” chart from easyJet is reproduced below; it breaks down capacity shares by three broad carrier groupings in the three main sectors — City, Beach and Domestic. In total easyJet accounted for 34% of the total, LCCs and others, 28%, and Legacies and Charters, 38%. When we carried out a similar but more detailed analysis (Aviation Strategy, December 2019) we identified that only 6% of easyJet’s markets were competed by ULCCs (Ryanair and Wizzair) while network carriers (including subsidiaries) were the most important competitor group with a 32% share of easyJet markets; charters only accounted for about 4%.
The point is that that easyJet has a lucrative but vulnerable segment of the European market to focus on and to attack. easyJet itself notes that the Legacies are preoccupied with restoring long-haul operations, restructuring and downsizing short-haul and also solving “significant balance sheet challenges”.
easyJet’s aim is to return to pre-pandemic capacity by 2023 and also to shift capacity from lower yielding airports — specifically regional French and Italian airports — to higher yielding primary airports. London has been restructured by closing its Stansted and Southend bases and strengthening Gatwick. Ideally, easyJet wants to be in the number one or two position at airports that have slot constraints and at which Legacy carriers are the key competitors.
A secondary strategy is to build up easyJet Holidays, attacking the remaining Legacy tour operators and charters. This will not be a major contributor to the airline’s financial recovery, but easyJet’s product and internet offering are of very good quality and it has the potential to transform the AIT market.
There does seem to be a genuine opportunity for easyJet in the post-pandemic world which it should be capable of exploiting now that its balance sheet has been boosted by the rights issue — £1.3bn of net debt, £2.2bn of equity, about £2.9bn in liquidity. And the rights issue provided further relief in that Stelios Haji-Iannou declined to take up his family’s share rights, opting for cash instead. This has reduced the family ownership of voting shares from 25.3% to about 15%, at which level his ability to lambast the board and launch lawsuits will be greatly diminished. Airbus will be relieved as well.
