EasyJet Plc (EZJ) said it’s ready to take on a low-cost challenge from Europe’s former flag carriers, predicting they’ll struggle to embrace the no-frills approach that’s lured travelers to discount operators.
A potential 86 million short-haul passengers flying from Europe’s top 20 airports each year could be surrendered to EasyJet by network carriers because they don’t feed lucrative long-haul services, Chief Executive Officer Carolyn McCall said in an interview, predicting that airlines including Air France (AF) may be left with as few as 21 million transfer customers.
EasyJet is attracting corporate fliers with allocated seating, flexible tickets and higher frequencies. While the approach differs from Ryanair Holdings Plc (RYA)’s ultra low-cost service that often depends on small and regional airports, both agree in their prediction that efforts by established airlines to maintain their intra-European routes are ultimately doomed.
“There are some clear winners in European short-haul,” McCall said at Bloomberg’s European headquarters in London. “I don’t see why any legacy carrier would want to continue losing money on short-haul when it can be done better by other carriers, except to feed their long-haul.”
EasyJet has sought to capture more corporate connections, winning a bid to fly between Rome Fiumicino and Milan Linate airports in October to break into a market dominated by Alitalia SpA. The airline also trumped Virgin Atlantic Airways Ltd. to be one of two U.K. carriers linking London and Moscow, a service McCall said is being well received by customers.
Ryanair said Sept. 4 that it may miss its profit target this year after a heat wave prompted people to holiday at home and increased competition depressed ticket prices, in a surprise announcement that caught investors off guard and weighed on the shares of European airlines. McCall said her own company is “on track” and that forward bookings are “fine.”
EasyJet advanced 7.2 percent to 1,358 pence in London, the biggest gain since May 15. The stock has risen 77 percent this year, the third-best performer on the 32-company Bloomberg World Airlines Index.
Cuts at network airlines helped lure 10 million business travelers to EasyJet in 2012, and rivals pared capacity on overlapping routes by 500,000 seats in the third quarter. McCall said she expects competition to intensify over the next five years as European airlines fight to keep market share.
The purchase of Spanish discounter Vueling Airlines SA by British Airways-parent IAG SA (IAG) and Deutsche Lufthansa AG (LHA)’s plan to rebuild domestic flights around its low-cost Germanwings unit are signs that rivals are learning from EasyJet, McCall said. Air France is also responding with a discount subsidiary called Hop as the carriers seek to slash short-haul losses.
“Our main competitive set is legacy carriers who are inefficient, have very high cost bases, very grand buildings, are not used to working in a lean environment and are not used to negotiating with airports on paying for what they use rather than the whole airport experience,” McCall said. “It is very difficult to think like EasyJet every day of the week.”
McCall took over in July 2010, having joined as an aviation novice from Guardian Media Group Plc. She runs EasyJet out of a large orange hangar at the Luton headquarters on the outskirts of London, an industrial building that remains true to the airline’s frugal approach to doing business.
From two planes in 1995, EasyJet has grown to more than 200 Airbus SAS aircraft carrying more than 59 million people annually, 20 million fewer than Ryanair. McCall said her airline competes directly with its Dublin-based rival on just 5 percent of EasyJet’s 637 routes, with Ryanair focusing on secondary or tertiary airports.
EasyJet shareholders in July approved an order for 135 Airbus A320 single-aisle jets valued at $13 billion, cementing McCall’s strategy and putting the carrier on track to grow seat capacity by between 3 and 5 percent annually.
“It’s modest, it’s cautious,” McCall said of the capacity target, adding that the flexibility of the arrangement was one of the deciding factors in favor of selecting Airbus over Boeing Co. (BA) airliners. Under the terms of the deal, EasyJet can expand its fleet to 298 jets by 2022 or shrink it to 165.
Under McCall, EasyJet has moved away from the pure discount focus of its founder and No. 1 shareholder, Stelios Haji-Ioannou. The entrepreneur has been a vocal critic of EasyJet management and the fleet purchase, trimming his stake to 36 percent this year in protest.
“He’s had a very clear view for a very long time, which is ‘Don’t buy any more planes because you should give money back to shareholders,’” McCall said of Stelios, who goes by his first name. “Our position is ‘You’ve got to invest in the airline to sustain it.’”
Confidence in McCall’s strategy has lifted the shares, valuing EasyJet at 5.38 billion pounds ($8.5 billion). The airline entered the FTSE 100 Index in March, joining the U.K.’s flagship carrier British Airways on the country’s benchmark. Ryanair, Europe’s largest discount carrier, has gained 33 percent this year and is valued at 8.92 billion euros ($11.8 billion).
The austerity measures gripping large parts of western Europe have actually helped EasyJet because its low-cost model attracts people who are not willing to sacrifice a holiday, said the CEO, who turns 52 on Sept. 13.
“We do well in good times, but we do proportionally better when things are tough,” she said. “The massive difference in the last 10 years is that people can go on a family holiday for a week for less than the price of a coffee a day. You put aside a very small amount of money and you can go to a beach, easily.”
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