EasyJet Investors Back $13 Billion Order as Founder Fumes
EasyJet Plc (EZJ) shareholders backed an order for 135 Airbus SAS jets valued at $13 billion, cementing Chief Executive Officer Carolyn McCall’s strategy of going toe-to-toe with former flag carriers on short-haul routes.
Today’s ballot at EasyJet’s Luton, England, base followed months of opposition from founder and top investor Stelios Haji-Ioannou, who while viewing the plan as misguided and harmful to dividend prospects had predicted on July 1 that McCall would win. Some 57 percent of votes were cast in favor of the deal.
Approval of the A320 purchase bolsters McCall’s plans to capture market share ceded by network carriers such as Air France and Deutsche Lufthansa AG (LHA) and move EasyJet further from its founder’s discount focus. While No. 2 to Ryanair Holdings Plc (RYA) among Europe’s low-cost airlines, EasyJet has watered down its no-frills approach in favor of a model that offers ancillary services such as flexible tickets to draw corporate traffic.
“If you look at where we are in our various markets there are legacy carriers in all of them,” Chairman John Barton, who took on the post on May 1, told reporters at the meeting. “We believe we can compete and take more market share. What we have to do is ensure that we are cheap enough in cost terms.”
More than 193 million votes backed the aircraft acquisition, with 144 million against and 346,000 withheld, representing an 85 percent turnout.
Prudential Plc (PRU)’s M&G Investments, which owns about 5 percent of EasyJet stock, backed management last August, when Stelios, who goes by his first name, sought to topple then-chairman Michael Rake, and intended to support McCall today, a person familiar with its intentions said prior to the meeting.
EasyJet first announced the jet order last month during the Paris Air Show, saying that it was subject to investor approval.
“It’s a unique point in history where the flags are undergoing so much stress and strain in short-haul that EasyJet has a readymade opportunity to transform its own model,” said Donal O’Neill, a Dublin-based analyst at Goodbody Stockbrokers who recommends buying the stock. “They’ve seen an opportunity to take significant market share on key business routes.”
EasyJet had a market value of 5.28 billion pounds ($8 billion) at 12:25 p.m. in London today, triple what the company was worth when McCall, 51, took over in July 2010, having joined as an aviation novice from Guardian Media Group Plc. She also delivered a coup when the company entered Britain’s benchmark FTSE 100 Index for the first time in March.
EasyJet plans to take 35 current-generation A320s between 2015 and 2017 and 100 re-engined A320neos from 2017 to 2022. Some 85 aircraft will replace older ones, with the rest boosting capacity by as much as 5 percent a year. The deal with Airbus gives flexibility to grow the 211-plane fleet to 298 jets by 2022 or shrink it to 165, according to a June 18 statement.
Like most aircraft buyers, EasyJet hasn’t disclosed the cost of the jets, which come with a list price of $91.5 million for the A320 and $100.2 million for the A320neo, and is likely to have negotiated a discount of as much as 55 percent, according to Panmure Gordon & Co. analyst Gert Zonneveld.
The A320neos are more efficient than the A319s that dominate the current fleet and have 24 more seats, delivering an 11-12 percent saving, EasyJet estimates.
Stelios trimmed his family’s stake to 36 percent this year and has threatened to sell more shares if extra jets are bought.
The entrepreneur, who founded EasyJet in 1995 and now lives mainly in Monaco, said in a July 1 letter to shareholders he was “disappointed” that newcomer Barton had approved such a large transaction so quickly and that investors were being asked to sign off on the purchase without clear price information.
“It is my firm opinion that this is a good deal for Airbus and a bad deal for EasyJet shareholders,” he said. Stelios also wants a dividend equal to half of profit after tax, up from the one-third ratio adopted by McCall after a first payout in 2012.
The 46-year-old, who stood down as EasyJet’s chairman in 2002 and quit the board in 2010 saying he wanted to become “a shareholder activist,” declined to be interviewed ahead of today’s investor meeting. His EasyGroup holding company, which controlled 146 million EasyJet shares on Jan. 22, also includes hotel, gym, fast food and vehicle and office rental businesses.
Barton said today he hasn’t yet met with Stelios but has had a “healthy e-mail correspondence,” adding that some of the pressure brought to bear on the board has been positive. “It has made us be meticulous in our governance of this deal and made us go through the figures again and again,” the chairman said.
EasyJet anticipates that the fleet expansion will generate “bigger and better returns,” after which it will further examine how best to return surplus cash to shareholders, he added.
Goodbody’s O’Neill said that while it’s good to have a shareholder challenge the management team, “everything they have done so far has led to improved profitability, improved margins and improved returns.”
EasyJet’s migration into more business-oriented routes has this year seen it add flights between London and Moscow, where it competes with British Airways (IAG), and Rome Fiumicino and Milan Linate, breaking into a market dominated by Alitalia SpA.
Things may get tougher if restructuring plans at network carriers end losses in short-haul markets, with the purchase of Spanish discounter Vueling Airlines SA by BA parent IAG and Lufthansa’s plan to rebuild European flights around its low-cost Germanwings unit suggesting rivals are learning from EasyJet.
“The better the model works, the more people are going to want to imitate it,” said Damian Brewer, an analyst at RBC Capital Markets in London who cites competition from Vueling at London Gatwick, EasyJet’s main base, and the handover to Germanwings of routes from Berlin. “It’s a clear piece of defensive strategy to reduce EasyJet’s ability to expand.”
Stephen Furlong at Davy Holdings in Dublin downgraded EasyJet to “neutral” earlier this year and reckons the company won’t have things entirely its own way in some markets.
“Vueling and Germanwings represent some sort of threat, but it’s a pretty localized one,” said the analyst, who lists as his top airline picks Ryanair and IAG, as International Consolidated Airlines Group SA is known.
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