EasyJet CEO McCall Dilutes Low-Cost Model to Chase Business-Travel Market

EasyJet Plc Chief Executive Officer Carolyn McCall said Europe’s second-largest discount airline will offer flexible tickets to lure business flyers, increasing competition with network carriers including British Airways Plc.

McCall, who has been conducting a strategy review since taking over in July, said today that Luton, England-based EasyJet will seek to lift profit margins by sharpening the focus on corporate customers, who account for 18 percent of its sales.

The switch will boost average fares and help differentiate EasyJet from Ryanair Holdings Plc, Europe’s biggest discount carrier, which is adding business-friendly routes at city-center airports but which offers no flexibility. At the same time the move brings its model closer to those of BA and low-cost rival Air Berlin Plc, and could also increase administrative costs.

“This would create a ‘low-cost plus’ carrier, sticking to discount principles but incorporating less traditional fare elements,” said Gert Zonneveld, an analyst at Panmure Gordon in London with a “buy” rating on the stock. “EasyJet has the network and frequencies to make a business offering feasible, but added complexity can have cost implications.”

EasyJet fell 4.8 percent to 448 pence as of the close in London, the biggest drop since July 28 and the worst performance on the eight-member Bloomberg EMEA Airlines Index, which declined 3.8 percent. The stock has gained 27 percent this year for a market value of 1.93 billion pounds ($3.1 billion).

First Dividend

McCall, 49, who joined from Guardian Media Group Plc with no experience of the aviation industry, said today that EasyJet plans to make dividend payments for the first time in its 15- year history after net income jumped 70 percent to 121.3 million pounds in the 12 months ended Sept. 30. The carrier reported a pretax profit of 154 million pounds after saying on Oct. 6 that the figure would beat a 150 million-pound target.

Revenue per seat will probably be flat in the first half of the current fiscal year, EasyJet said. That guidance is “disappointing” and suggests a revenue bounce enjoyed by the industry since the end of the recession is coming to an end, said George Humphreys, an analyst at NCB Group in London.

The International Air Transport Association said on Sept. 21 that airline earnings will probably peak at $8.9 billion this year before falling to $5.3 billion in 2011. While European carriers have generally raised guidance as demand recovers, EasyJet’s fiscal year begins later than at peers such as Deutsche Lufthansa AG and Ryanair.

Stelios Pressure

EasyJet is paying a dividend and modifying its strategy following pressure from founder Stelios Haji-Ioannou, who had lobbied McCall to return cash to investors and adopt a less- seasonal and tourist-dependent model. The entrepreneur said today that the CEO’s announcements were “positive moves.”

The first shareholder payment will be made in 2012 for the current fiscal year, conditional on a dividend cover of five times, EasyJet said in a statement.

Ryanair paid a one-time dividend of 500 million euros last month, its first such award, after CEO Michael O’Leary opted to limit fleet growth, citing a maturing discount-travel market. It’s also looking at routes to all European airports, other than London Heathrow, Frankfurt and Paris Charles de Gaulle.

While EasyJet’s business plan is “sound,” the strategy review showed it could capture a bigger share of European short- haul travel and lure more corporate flyers, McCall said.

To target that market EasyJet will introduce flexible fares allowing customers to change flights until two hours before departure. Passengers will be able to make unlimited changes one week before and up to three weeks after the booked date, and the fare will include speedy boarding and one checked luggage item.

Fleet Plan

“We want to target more business customers,” McCall said in an interview on Bloomberg Television’s Countdown with Maryam Nemazee. “It will be an investment, but one that will return itself quite comfortably.”

EasyJet will add 24 aircraft by September 2013, giving it a 220-strong fleet, equal to a 7 percent capacity increase. Growth will thereafter be in the region of 4 and 8 percent a year, the CEO said. Seating rose by an average 15 percent in 2005-2008.

“This looks like a sensible strategic plan,” said Wyn Ellis, an analyst at Numis Securities in London with a “hold” rating on EasyJet stock.

Stelios, who prefers to be known by his first name, said McCall should “carefully assess the financial viability” of any expansion, while also aspiring to a dividend payout ratio of 50 percent “over time.”

Brand Agreement

McCall has also sought to ease tensions with EasyJet’s founder and top investor by resolving a brand-licensing dispute.

The Oct. 11 deal allows the carrier to use the “Easy” identity to boost revenue through marketing deals with other companies for up to 50 years, in exchange for paying its founder a royalty of 0.25 percent of revenue, fixed at 3.9 million pounds and 4.95 million pounds in the first and second years.

“People had assumed that the brand-licensing deal marked the end of public debate about strategy with the largest shareholder, but this that may not now be the case,” said Douglas McNeill, an analyst at Charles Stanley Securities in London with a “sell” recommendation on the stock.

McCall has also faced crew shortages that caused delays across over the busy summer months. The CEO said today that revised assumptions for staff numbers, flexible rosters and improved management and communications should address the issue.

Analysts had anticipated full-year earnings of 114 million pounds. Net income was equal to 28 pence a share, up from 71.2 million pounds, or 16.6 pence, a year earlier, while sales rose 11 percent to 2.97 billion pounds.

To contact the reporter on this story: Steven Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.