What about
IAG/easyJet?
Sep/Oct 2022
In the previous issue we speculated about the rationale for a Ryanair/Wizz merger. Since then, absolutely nothing has developed on that front, but media attention has focused on IAG/easyJet. The source of the rumours was an interview with IAG’s CEO Luis Gallego in the Sunday Times where he hinted at expanding the IAG airline portfolio and didn’t deny interest in easyJet (or TAP for that matter).
There are a number of strategic and/or expedient reasons for taking IAG/easyJet seriously:
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The economic outlook for the UK is very uncertain. This year saw a welcome resurgence in demand post-pandemic, but this may not continue in 2023 and beyond, as inflation and interest rates soar, and the UK government seems determined to talk itself into a recession. In such circumstances a merger might be a good defensive move.
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Refinancing during the pandemic has left airlines with comparatively high levels of liquidity. As at mid-year IAG had €9.2bn in cash and €13.5bn in broader liquidity; easyJet had €3.0bn in cash.
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An easyJet merger might finally solve BA’s perennial problem at Gatwick where it has consistently lost money.
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easyJet could be used to restructure BA’s intra-European feed network to Heathrow, leaving BA to concentrate on its profitable long-haul network.
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Stelios Haji Ioannou no longer has an active interest in the airline he founded, having reduced the shares he controls to 15%, though this is still a significant stake, but it is a reasonable guess that he is not happy about the 40% decline in easyJet’s share price this year (compared to a 20% fall in IAG’s value).
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The easyJet brand could in theory be smoothly incorporated into the IAG ownership structure alongside BA, Iberia, Aer Lingus and Vueling.
However, BA and easyJet are the UK’s two biggest airlines, both with bases at Gatwick, so there would be major anticompetitive issues to address. (There is a precedent for BA taking over the second largest British carrier — BCal, way back in 1987.)
The solution might be found in these two charts. If it can be argued that competition primarily takes place on an airport-pair rather than a city-pair basis — that Heathrow is a distinct market from Gatwick or Luton — then it is possible to refute the anticompetitive claims.
On an airport-pair comparison there is only an approximate 12% overlap in seat capacity between the two airlines. Looking at IAG’s top 30 intra-European routes only three are in direct competition with easyJet, the most important by far being Barcelona-Gatwick where Vueling and easyJet collide. For easyJet, IAG airlines compete on 12 of its top 30 airport-pairs; Vueling is generally easyJet’s major rival, though BA does directly compete on Amsterdam-Gatwick and Faro-Gatwick.
| £bn | Mar-22 |
|---|---|
| Fleet assets (inc lease rights) | 4.68 |
| Intangibles | 0.57 |
| Cash and short term deposits | 3.5 |
| Other current assets | 1.58 |
| Total Assets | 10.33 |
| Long term debt | 3.46 |
| Other long-term liabilities | 0.46 |
| Other current liabilities | 3.97 |
| Total Liabilities | 7.89 |
| Shareholders' Equity | 2.44 |
| €bn | Jun-22 |
|---|---|
| PP&E | 18.16 |
| Intangibles | 3.29 |
| Other fixed assets | 4.24 |
| Cash and short term deposits | 9.19 |
| Other current assets | 4.95 |
| Total Assets | 39.83 |
| Long term debt | 17.67 |
| Other long-term liabilities | 3.35 |
| Current liabilities | 17.02 |
| Total Liabilities | 38.04 |
| Shareholders' Equity | 1.80 |
