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Whats eating easyJet?
Profits are soaring, but the airline is stuck between BA and Ryanair and investors are losing faith
Oliver Gill
Saturday August 26 2023, 6.00pm BST, The Sunday Times ILLUSTRATION BY PETE BAKERThe 1980s monorail linking Gatwicks north and south terminals came to a stop before disgorging a wave of excited families shortly after 6am. With luggage, children and all manner of holiday paraphernalia in tow, they raced into the airport to easyJets dedicated check-in area.
Among those preparing to drop off their bags were Alex and Ian Cooper, on their way to a ten-day trip to Rome. The rationale for choosing easyJet? Its cheap, said Alex. If the price was right, we would rather fly British Airways, who make you feel a bit special, she added. But they were more than content to make their trip with a budget rival even though easyJets hefty baggage charges drive her mad, Alex said.
The coming days will be the busiest of the year for Gatwick and likewise for easyJet, which operates 48 per cent of the airports flights. It is a crucial period for profit-making at the airline, which, like its rivals, suffered first from the pandemic and then major disruption last summer as a result of labour shortages.
Recent signs bode well. EasyJet made record profits in the three months to June, and earnings in the year to September could eclipse those it made in pre-Covid 2019 despite the carrier flying an estimated 10 million fewer passengers.
But for all this good news, investors still take a dim view of the orange airline. Its share price is lagging rivals, stubbornly stuck at roughly a third of its pre-pandemic levels stoking rumours that easyJet is vulnerable to a takeover.
Gatwick last week was very busy but well ordered a far cry from the chaos a year ago as airlines, airports and ground- handling firms abjectly failed to hire enough staff to cope with post-Covid demand. Airports had to erect makeshift marquees to cater for queues that extended out of terminal buildings. EasyJet went to drastic lengths, even removing a whole row of seating from some of its jets so fewer cabin crew would be needed.
Since those grim days, Johan Lundgren, chief executive since late 2017, has been pushing up fares sharply, riding the wave of revenge tourism among flyers forced to stay at home for two years of lockdowns. Average fares are expected to be £62.60 this year, up a fifth on the £52.10 charged during 2019, according to figures compiled by City analysts.
Johan Lundgren, chief executive of easyJet, has been pushing up fares
ALAMYHe has also been squeezing more money from passengers on top of the basic flight fare. Where you used to be able to get away with free hand luggage of pretty much any size, now you will pay £24 for a bag that cannot be stowed under the seat in front of you. Lundgren has also been successful in getting more people to pay for other services such as speedy boarding, food and seat selection.
Despite the cost of living crisis, customers are paying up. Industry experts estimate easyJet will rake in £16.50 per passenger this year in so-called ancillary spending, almost double the £8.70 per passenger prior to the pandemic.
Meanwhile, easyJets in-house holiday division which offers four and five-star hotels to higher-spending customers is expected to generate more than £100 million of profits. So why is the City so wary?
In part, it is an industry-wide issue: last week, valuations in the overall travel sector hit all-time lows, according to analysis by investment bank RBC. But easyJets shares are the worst of a bad bunch down about two thirds on pre-pandemic levels (Wizz Air and Jet2 are also heavily down, but by only 50 per cent and 44 per cent respectively). Ryanair the darling of the industry among investors, due to its ruthless focus on high profit margins is up 2 per cent over the same period.
Whenever a sector is a bit out of favour, investors are likely to stage a flight to quality [companies], so youd expect to see Ryanair do better, said Robert Boyle, founder of Gridpoint Consulting.
Measured by a multiple of the share price to profit, according to analysts at BNP Paribas, easyJet shares stand at 9.7 times, compared to Ryanairs 10.7 and Wizz Airs 27.4.
The easyJet board, chaired by former Royal Bank of Scotland chief executive Stephen Hester, is understood to be perplexed as to why the stock is so cheap. For Boyle, the answer is not complicated: easyJet, he said, has consistently lagged the leaders on profitability since Covid. And despite soaring fares and baggage costs, it is a trend that continues. The airlines most recent financial figures revealed that its profit margins were only 8.6 per cent, against 19.5 per cent at Ryanair and 16.3 per cent at British Airways owner IAG.
EasyJets take-off and landing slots at Gatwick would be among the attractions to any prospective bidder
ALAMYEasyJet has, said Boyle, got itself in a position where it is more costly to run than no-frills Ryanair, yet unable to charge as much as flyers such as BA. Theyre in the middle, and [for profit margins] that doesnt seem to have been working well for them recently.
EasyJets position in the middle ground is nothing new. While Sir Stelios Haji-Ioannou set up the airline in 1995 with the mantra of making flights from Luton to Scotland as affordable as a pair of jeans, it was undercut by the likes of Ryanair in the decades that followed.
Rather than head for cheap airports like its Irish rival, it decided to keep flying from Gatwick, Milan Malpensa and Paris Charles de Gaulle. Not only is this more costly, but the strategy pits the airline against full-service carriers like BA and Air France. In fact, easyJet only goes head-to-head with Ryanair on 10 per cent of its routes.
Its choice of airports is a deliberate one made to set itself apart from the cheapest of its no-frills rivals. But this means it is fighting to attract British Airways customers by offering lower prices while shouldering the same level of costs.
Some analysts said another weakness of easyJet is its disproportionate exposure to customers in Britain, where inflation is running as much as two percentage points higher than on the Continent, leaving people with less spending power. About half of easyJets customers are from Britain, against Ryanairs 25 per cent and Wizz Airs 10 to 15 per cent.
With easyJets shares underperforming its rivals, there has been some speculation this year that the company could be vulnerable to a takeover.
Michael OLeary, chief executive of Ryanair, has previously claimed that it is only a matter of time before easyJet is swallowed up by either British Airways IAG or Air France.
The talk in investment banking circles during the spring was that a private equity firm could swoop to buy easyJet and sell bits of it off in piecemeal fashion, according to City sources.
As one airline-sector banker explained, easyJets aircraft alone are arguably worth more than the companys stock market valuation. It owns 180 planes outright and has an order with Airbus for a further 163, which is valued at $1.3 billion (£1 billion). On a per-share basis, according to analysis by the stockbroking firm Davy, that means the fleet is worth 500p per share nearly 80p, or 15 per cent, more than the price at which the stock is currently trading.
Further upside potentially worth hundreds of millions of pounds could come from the value of easyJets take-off and landing slots at Gatwick, operating licences and other intangible assets.
Some analysts have suggested easyJet is suffering because of a disproportionate exposure to the British market
PETER NICHOLLS/REUTERSEasyJet has been on the receiving end of takeover interest before. In 2021, it received, and rejected, an approach by Wizz Air. Sources at the airline said there have been no such talks however preliminary with any credible bidders since. Nor is the board aware of any potential suitors, they added.
But not everyone is convinced. They are obviously a takeover target, said one top UK airline executive.
How can they claim they are not, given where their share price is? asked another. Some people have linked American airlines such as JetBlue (which has a small transatlantic operation) and Delta Air Lines (a 49 per cent shareholder in Virgin Atlantic) as potential suitors for easyJet. Others scotch such ideas, claiming they would be blocked under post-Brexit ownership and control rules.
Wizz Air is naturally linked with a return to the negotiating table. But Jozsef Varadi, its chief executive, insists not for now at least. We have recreated our backbone, and that backbone gives us plenty of opportunities for organic growth in the future. And we are going to stick with a strategy, he said.
Paul Charles, founder of travel consultancy The PC Agency, said: With its shares still treading water at the low levels seen during the pandemic, easyJet remains highly vulnerable to a takeover, unless investors recognise its deserved value. The irony is that easyJets product is better than ever. It is now much more than a no-frills carrier.
While the airline may not be winning friends in the City, passengers patiently waiting to drop off hold bags at Gatwick clearly recognised its value.
The six-strong Burchill family had driven down from Essex to fly to Valencia. Grandfather Graham said easyJet is reliable and well-priced, while British Airways is too expensive. In an uncertain world, this is probably the best feedback Lundgren could hope to hear.
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