Suddenly, Life Is Hard for easyJet

After eight years of double-digit growth, it seems easyJet's days of easy money are coming to an end. On May 7, Europe's biggest discount airline announced losses of $79 million for the six months ended Mar. 31. EasyJet Airline Co. says a weaker economy and the war in Iraq curbed demand, forcing it to slash average fares by 10.7%. Chief Executive Ray Webster remains confident that he can get easyJet back on track, pointing out that the bulk of profits are made in the second half of the year. "The environment is challenging, but the propensity for travel within Europe remains strong and the number of passengers flying with easyJet continues to grow," Webster says.

Webster may be overly optimistic. As Ryanair's ambitious expansion plans remain on track, easyJet's look less certain. Ryanair flies to outlying airports far from city centers, a strategy that avoids direct competition for slots and passengers at major airports. By contrast, easyJet competes head-on with Europe's flag carriers at major destinations such as Paris' Roissy Charles de Gaulle. EasyJet also vies both for a slice of the business travel market and the tourist trade, while Ryanair largely targets leisure travel. The trouble for easyJet is that the national airlines are aggressively defending their positions on more lucrative routes used by business travelers. This, combined with the possibility of additional government support for some national airlines, may erode easyJet's profitability, says Morgan Stanley European airline analyst Martin Borghetto. "EasyJet's earnings outlook has become much more volatile," he adds.

EasyJet's rapid expansion over the past year also has some observers wondering if the company has bitten off more than it can chew. In July, 2002, easyJet completed its $610 million takeover of rival British discounter Go. "By acquiring Go, easyJet took a two-year leap in growth," says Davy Stockbrokers airline analyst Stephen Furlong. But the deal didn't come cheap. Furlong reckons easyJet paid $77 for each of Go's 5.8 million passengers for the year ended September, 2002, nearly 10 times the rate Ryanair paid for Dutch no-frills carrier Buzz. Goodwill and integration costs related to the Go acquisition accounted for $25 million of the company's losses.

EasyJet is also ramping up its fleet, a strategy Ryanair is pursuing as well. In March, easyJet announced the purchase of 120 Airbus A319 aircraft, and an option for 120 more. If easyJet is to fill these planes, it must carry 25% more passengers a year for several years. EasyJet is confident it can pick up business as some of Europe's major airlines continue to cut capacity on less lucrative short-haul routes, such as to tourist destinations, or as second-tier national carriers consolidate or go bust. But some analysts think such bets are too sanguine. "EasyJet has embarked on a high-risk strategy," says BNP Paribas airline analyst Nick van den Brul. Europe's flag operators are cutting costs aggressively on some of easyJet's routes to major European cities. "We've significantly improved our performance" by filling more seats after slashing fares, says Air France CEO Jean-Cyril Spinetta.

It's not just the Continent's majors that are fighting back. EasyJet is facing increased competition from charter airlines and new low-cost carriers serving holiday hot spots such as Ibiza and Málaga. If easyJet is forced to cut fares further, results will suffer. Davy's Furlong estimates that every 1% decline in airfares trims easyJet's revenues by $9 million. Demand for low-cost travel remains strong. The search for profits in low-cost travel just gets harder.

By Kerry Capell in London, with Carol Matlack in Paris

— With assistance by Carol Matlack

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