As a result of the disruption faced this year, EasyJet announced that it had burned through GBP 774m in April-June and GBP 651m in July-September. Added to this, flying capacity has been reduced to a maximum of 20% for the rest of the year. While there seems to be light at the end of the tunnel, the dire situation for the airline industry looks set to continue. In one of our Interviews, a senior executive at Flybe Group plc told Third Bridge Forum of the market consensus for recovery: “30-40% of capacity [operating] towards the back end of 2020. Then, the longer term, a view [that it’s] going to be 2023, maybe even into 2024, before we get back to 2019 levels of demand.”
A number of actions have been taken by the budget airline, however, in order to stymie the losses. One part of the strategy, which was “slightly unusual in that not everybody has done it”, was sale and leaseback. The programme covered 23 aircraft and raised more than GBP 600m. “The positive side is they’ve got a large asset of huge value in terms of an owned fleet, and it would seem silly not to use that… to raise cash.” However, there are downsides. In the long term, EasyJet will face higher operating costs: “Of 23 aircraft, if that’s GBP 5m [in potential incremental costs], that’s a GBP 150m-per-year increase in aircraft ownership on a cost base that already was under pressure.”
Like many airlines, EasyJet announced cutbacks. The airline has announced job losses and reduced working hours. In addition, the company has used government support, including a GBP 600m loan from the UK Treasury and Bank of England’s emergency coronavirus fund as well as furloughing staff. What’s more, the Flybe executive mentions deferring payments, but this could prove a double-edged sword: “The question there is, how much have you avoided having to pay the cost? What’s the difference between reducing cash burn vs it needs to be paid at some point?”
Operational consolidation is already on the cards. The hubs at Nottingham, Stansted and Southend airports were axed from 1 September. According to the Flybe executive, this could be because “the bigger the base, the more efficient the operation is. I think we’re probably seeing consolidations on some of the smaller bases, and particularly Stansted where you’ve got the impact of such a large Ryanair operation.” In addition, they highlighted the downsizing in Berlin. “It’s [an] investment in the big asset to capture slots in Berlin, and yet a significant downsizing. To me, in a way, that is more significant to watch than the likes of Stansted, Southend and Newcastle.”
In general, as a former senior executive from International Consolidated Airlines Group SA told Third Bridge, consolidation would make sense given the current economic climate, as it involves the “disintegration of the weak players, and we’re going to see more of that.” Beyond the main airline companies with the strongest financial positioning, the outlook is bleak. “Airlines are just not built for three months of zero revenue. My default position is, give me a random airline, they’re probably bust.” This latter group would still be able to re-emerge “if they have a valuable market position that someone is willing to back or a government that’s going to step in.”
Our specialists also discussed the pathway to recovery. “Even if demand was here tomorrow and restrictions were gone, the airlines will need many, many months to come back to normality,” commented a former head at EasyJet. He also pointed to the fact that, on top of the financial losses, “you need to think about, for all the airlines, the amount of know-how in the companies that is being destroyed at a rate that is unprecedented.” Looking into the type of travel that will see a resurgence first, the Flybe executive commented that, in his view, “leisure will rebound more quickly, which is not so good for the yield for passenger flights with EasyJet, but then, the big volume, over 80% of traffic, is leisure.”
More turbulence could come in the form of disruption to the usual playoff between pricing and booking times. “To fill a flight, you need 200 days on average. Most of the traffic comes from 45 days”, the former EasyJet head remarked. The fares charged closer to the flight, he continued, depend on how many seats have already been filled. Although “there’s so much uncertainty and the rules are changing so much that people are not even looking”, they believe that customers will be willing to pay a premium once uncertainty over travel is cleared.
Indeed, looking more into EasyJet’s pricing, it was described as a “bit of a hybrid” between budget and carriers by one specialist. In another Interview, the former EasyJet head revealed that they “did quite a lot of experiments back in 2013, ’14, ’15 in terms of doing price valuations in different markets against our main competitors.” This substantiated that the prices they were charging weren’t affecting uptake and, he continued, was believed to be down to the quality of the product and people’s perception of the brand.
The challenges EasyJet is facing are not unique to the company, but it appears to be treading carefully and consolidating where possible – evident in its moves to sell and leaseback aircraft or removing operations to increase efficiency. What remains to be seen, though, is how the industry will chart the course back to normality.
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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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