A smart redeployment of planes could fix this. Continuing to compete with legacy carriers in big airports like Amsterdam Schiphol may be unwise when the pandemic has whacked business travel. Reinforcing Milan and Rome, and linking more holiday spots with nearer, smaller cities — which easyJet does less than its peers — makes more sense. Newly announced routes like Newcastle to Fuerteventura are a promising step.
Go too far, however, and you enter the thin-margin, crowded airspace of Jet2 and Tui TUI1n.DE. Maybe easyJet can navigate this complicated flight path without hitting turbulence. Still, shareholders are better off cashing out and letting Apollo try.
Context news:
Shares in Ryanair fell around 5% in early trading on July 20, after the low-cost carrier announced a 34% year-on-year decline in profit after tax for the quarter to the end of June.
CEO Michael O’Leary said fares in the quarter had “required stimulation”, as the conflict in the Middle East led to economic uncertainty and hesitancy from consumers to book holidays, while some prospective fliers were also concerned about the risk of jet fuel shortages.
Ryanair said fares in the quarter to the end of September were tracking modestly down year-on-year, versus previous trends indicating they would be broadly flat.
On July 10, U.S. asset manager Apollo Global Management and easyJet announced they had reached an “agreement in principle” on a cash offer for the airline worth 715 pence per share.
The statement said the proposal valued easyJet around £5.7 billion.
Under UK takeover rules, Apollo has until August 7 to either announce a firm intention to make an offer or walk away.
Shares in easyJet were trading at 671 pence at 0840 GMT on July 20.
Why the easyJet buyout looks difficult
EasyJet EZJ.L looks an odd target for a private-equity buyout: besides potentially spending £13 billion over the next five years refreshing its fleet of aircraft, it’s exposed to the famously turbulent airline business, which was on display again on Monday as Ryanair RYA.I warned of fares going lower because of nervy consumers, despite higher fuel costs. If Apollo Global Management APO.N wants its proposed £5.7 billion acquisition to pan out, it will need a complex strategic shift — not just selling planes and hoping costs can be cut to match its high-margin Irish rival.
Apollo is probably targeting an internal rate of return of roughly 20% when it sells out in five years’ time. Yet based on Visible Alpha forecasts, and assuming half the buyout is financed with debt and valuation multiples stay unchanged, easyJet would need a 19% EBITDA margin to get there. Projections suggest it will peak at 15%, which would generate a 6% return, according to Breakingviews calculations.
Sale-leasebacks help, but do not solve the problem
To be sure, so much aircraft spending seems unrealistic under a leveraged buyer, who typically wants debt to fall before exiting. Given Apollo’s aviation-finance footprint, the airline could sell newly delivered Airbus AIR.PA jets and lease them back. Doing this for a possible £5.2 billion of capital expenditure in 2030 and 2031 would lift returns to 20%.
The catch: investors would see through swapping cash today for higher operating costs tomorrow, and lower the exit valuation. Ultimately, a new owner must make operations more profitable, as Apollo did nine years ago when shifting Sun Country to a no-frills model. At 7 euro cents per available seat-mile, the unit costs of easyJet’s airline are almost 50% higher than Ryanair’s.
Route mix and holiday arm complicate efficiency gains
But it’s misleading to equate the two. Ryanair focuses on cheaper, out-of-the-way airports where it often faces little competition. A Breakingviews analysis of Cirium data suggests that it has above 80% market share in 64% of its routes. For easyJet, it’s 41%, because it serves larger, slot-constrained airports like London Gatwick, Milan Malpensa and Geneva. Ditching these for cheaper secondary airports could jeopardise its growing package-holiday division, which enjoys operating margins over double the broader group’s, helped by its “asset-light” model of organising holidays but owning no hotels.
A better peer is IAG-owned, Spain-focused Vueling, which also offers mid-market service, and probably has an EBITDA margin around 20%, disclosed data suggests. EasyJet’s airline has unit sales 15% higher than Vueling’s, whereas unit costs are 6% higher. The problem is that this revenue boost isn’t enough to offset the added expenses of the holiday arm. This also suggests there’s less room for finding efficiencies than it might seem: easyJet needs to fly from costlier UK bases, because Britons are massive package-holiday users.
APO•
