Podcast: What Could Happen To UK Budget Carrier EasyJet?

ATW editors discuss the move by a U.S. investment firm to acquire EasyJet.

Subscribe Now

Don't miss a single episode of the award-winning Check 6. Follow us in Apple Podcasts, Spotify or wherever you listen to podcasts.

Discover all of our podcasts at aviationweek.com/podcasts

AI-Generated Transcript

Karen Walker (00:10): Hello everyone and welcome to Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week Air Transport Editor-in-Chief Karen Walker. Welcome on board. So this week I'm delighted to be joined by two of my colleagues who are in the UK and that's Routes Editor-in-Chief David Casey and ATW European Bureau Chief Victoria Moores. So welcome to you both. We spend a lot of time together, but it's always nice to come together on Window Seat. And today we're going to discuss something that's been carefully watched by the air transport industry in the UK and Europe. And that's the moves by US investment firm Castlelake to purchase UK-based low-cost carrier easyJet. So Victoria, let's kick off with the basics. For listeners who've never flown easyJet, tell us a bit about that airline and why it's so successful.

Victoria Moores (01:02): Yeah, thanks, Karen. easyJet really stands out in Europe. Basically, we've got three very large low cost carrier players. They would be easyJet, Ryanair, those are the two kind of founders of European low cost, plus Wizz Air, which came along later, but has grown very, very significantly. And what I would say distinguishes easyJet from the other two is pretty much since the early days, easyJet focused on primary airports and they built up slots at primary airports. They focused on the customer experience. And what that really led to is that easyJet became kind of the business traveler's low cost carrier. Obviously they've got a lot of leisure activity. They were also a pioneer in really focusing into the holidays business as well, which I'm sure we'll touch on. But I would say that if you're a business traveler traveling in Europe looking to fly potentially on an LCC, you'd definitely consider easyJet as maybe being a preference.

(02:01): And that's where they stand out and they're separate. Whereas Wizz and Ryanair are more ultra low cost carrier style models, much, much more focused on we are the cheapest option. Whereas obviously you get low prices with easyJet too, depending on when you book. But I'd say that's what makes them stand out. Plus they've got these really strong portfolios of slots at the primary airports. An incredible fleet, they've got around about 218 Airbus narrow bodies on order and they've also already got about 356 aircraft in their fleet. Around about a third of those now are NEOs. They've still got A319s, which are going to be exiting the fleet. But yeah, they're definitely a standout performer in Europe and their focus on technology in the environment too means that they really do aim to be cutting edge in those areas.

Karen Walker (02:53): Yeah, I'm based in the US, so I don't get to fly with them very often, but the few times I have, I've been really impressed. They seem to me more like closer to Southwest Airlines in terms of, you mentioned it, the friendliness of the people. And yes, I mean, people call them squeezy jet because they pack people in like a low cost carrier has to do for the CASM, but they do it really well. They are a nice and good airline and very successfully financially, yes, Victoria. Yeah.

Victoria Moores (03:30): One of the things I would say is that a few years back, quite a few years back now, I interviewed Mike O'Leary and he said, if I'd have realized that being nice to people would be profitable, I would've done that a lot sooner. Now, obviously he was joking there at a slightly tongue in cheek, but I think that is the way that the market perceives easyJet as being arguably a friendlier version of Ryanair, less pressure on costs.

Karen Walker (03:53): Doesn't take a lot to be friendlier than Ryanair. David, can you just talk a little bit also about the, again, why easyJet is different from other European LCCs and particularly from a network perspective?

David Casey (04:10): Yeah, sure. I think the biggest difference is that easyJet's evolved beyond the traditional low-cost airline model. If you look at some of Europe's biggest LCCs, they all have slightly different strategies, as Victoria said. So Ryanair has built its success around scale, ultra, ultra low costs and more of a reliance on secondary airports. Wizz is focused on central and Eastern Europe with also very, very low operating cost, while you've got Jet2 as well, which has become very successful, but focusing more on leisure and package holidays. And I think easyJet sits somewhere different. So it's deliberately built that network around some of Europe's largest population centers and those primary airports, as Victoria said. And I think about 73% of its flying actually takes place at slot constrained airports. They include London Gatwick, Geneva, Amsterdam, Milan Malpensa, and Lisbon as well. And I think those airports give it access to both leisure passengers and higher yield business traffic, as again, Victoria said in her introduction.

(05:17): And I think it's given it that scale and the slots in places where other competitors simply can't compete because they don't have access to those slots. And I think that creates quite a very different competitive position for easyJet. It's not just competing on price, but it's competing on convenience, frequency, airport choice. So if you're flying from Central Milan, for example, or Amsterdam or London, easyJet is often operating from the airport that passengers actually want to fly to. So if you look at the network as well, it is substantial. I think it carries about a hundred million passengers annually, serves around 165 airports, 1,200 routes and that gives it a really broad European network outside those legacy groups. And then again, in terms of the differentiation, as Victoria said, we've got easyJet holidays, which I'm sure we can come onto. And that's, I think, quietly become one of Europe's fastest growing package holiday business.

(06:17): It's a real difference from Ryanair, which is largely just focused on the airline itself. And I think that holiday business gives it a higher margin revenue stream and allows it to capture more value from each customer.

Karen Walker (06:31): Victoria, any other thoughts on what makes easyJet different?

Victoria Moores (06:35): Yeah, it's really, again, it's for the non-European listeners primarily, but to put that airport strength in perspective, easyJet has got 196 slot pairs roughly at London Gatwick. So that's obviously the UK's second hub. That is 46% of Gatwick's capacity. And what they've said for a really long time at easyJet is that they've spent a long time building up this slot position at the airports. It makes it incredibly hard to replicate. So the way that you can get your hands on that would be through an acquisition potentially. And I did see one estimate, I don't know how valid it is, that the easyJet slots alone could be worth around a billion pounds. So that's already adding a huge amount of asset value to the company.

Karen Walker (07:23): So in real money, that's well over a billion dollars. David, so let's talk a little bit about Castlelake. Who are they and where do things stand now with what are they doing?

David Casey (07:38): Yeah, well, Castlelake is a Minneapolis-based investment firm. I think it manages about $38 billion of assets. Perhaps it isn't a household name like some of the others like Blackstone or KKR might be, but it does have an established investor within the aviation sector. And I think so far its biggest airline investment to date has been in SAS, Scandinavian Airlines. So in 2023, Castlelake led the consortium that rescued SAS from bankruptcy alongside Air France-KLM, the Danish State, and Lind Invest. And less than two years later, it agreed to sell that stake to Air France-KLM, which is now moving to take a majority control. I think that shows Castlelake strategies necessarily to own airlines forever. It's to identify businesses where it believes value can be created and then realize that value in, well, a relatively short period of time in terms of the SAS acquisition.

(08:38): And what have

Karen Walker (08:39): They done now, David, with easyJet? What's the status so far?

David Casey (08:43): Yeah, well, within easyJet, it's been quite persistent in terms of the potential takeover. So it made its first approach on June the 12th and it offered 565 pence per share. That's around $7.40. And when that was rejected, it returned with an offer of 600 pence per share, then 625, and then most recently 650 pence per share. And that values the airline at almost five billion pounds, which is about 6.6 US dollars. So the board has rejected every proposal so far and it says that those bids undervalue the airline business and it's argued that its share price has perhaps underperformed a little because it's being depressed by the Middle East conflict. So Castlelake now has until July the 5th to make a final offer or walk away. I think what's been interesting so far is its persistence and I think it has demonstrated that this is a really serious offer rather than just a speculative bid.

(09:43): It went public with that offer. It's appealed directly to shareholders and it's also recruited former easyJet Chief Operating Officer, Peter Bellew, who I know you know Karen, he's no stranger to the industry. He's been at Ryanair, he's been at Malaysia Airlines most recently Riyadh Air is recruited him as well as aviation executive, Mark Breen to help create an EU controlled ownership structure and it's secured backing from Brookfield Asset Management as well. So although the offers have been rejected so far, more recently easyJet has agreed to give Castlelake limited access to some commercial information. So I think that suggests that discussions are potentially moving, though we'll see how that plays out in the next few days.

Karen Walker (10:29): So to be clear, David, easyJet didn't start this move. They weren't looking to be acquired by Castlelake or anybody else at this stage. As we've just said earlier, they've been very successful in the way they're operating now. So they didn't initiate this Castlelake did. Why now?

David Casey (10:53): I think there's probably two factors behind this. I think one of it is definitely timing. easyJet share price, as we said, has perhaps underperformed in recent years and this year has been affected by the crisis in the Middle East. I think it has seen that easyJet has a really strong portfolio of assets. As we've already said, it has that slot portfolio. It's got the about 350 aircraft already. It's got 280 aircraft on order. So there's the potential pipeline of future aircraft that are going to come into the fleet. I think it is just seen that there's potential here for, I don't want to say a bit of a bargain, but to get some assets, very strong assets for cheaper than perhaps they should be.

Karen Walker (11:43): And Victoria, it's interesting with those assets, as you mentioned earlier, include all those aircraft. Then there's a lot of NEOs they've already got in their fleet, Airbus NEOs, all narrow bodies, of course, but they've got a lot more on order and those are being really sought after by a lot of other airlines and leasing companies would love to get hold of those. So there's that element perhaps too?

Victoria Moores (12:10): Yeah, absolutely. I mean, being able to access aircraft at a time when it's very hard to get hold of delivery slots when they're already coming into the fleet and the NEO percentage of the fleet is really about to scale up. So that's only going to impact easyJet's profitability over time. But I think that I was reading some analyst briefings on what's going on with easyJet and that does reveal some other interesting things. So it's a former IAG executive, Robert Boyle, who puts out analyst comments and he said that there's been interesting things going on in the background over the last few years with easyJet where they've actually lost an awful lot of their market capitalization. They went down from 4.8 billion down to three billion, that was even after they'd had some equity investment coming in. And that means that over time, to just put it simply, Ryanair shares by comparison, Ryanair's value has gone up by 76%, whereas easyJet has gone down by 72%.

(13:17): And at the same time, easyJet's margin has dropped from 9% to 5% according to these figures, whereas Ryanair is at 15.8%. So if you're looking at the market, there's definitely been something happening there and that might be another reason why it's opportunistic right now.

Karen Walker (13:34): As David said, maybe thinking they could get a bargain, although the way easyJet's playing it, it's not going to be as big a bargain as they probably thought.

Victoria Moores (13:45): And Karen, there's also the complexity of this as well. We don't know really, apart from those two names that have been associated with the European shareholder potential, we don't know who that actually is, whether or not there's any other airline involvement there. If there is airline involvement, that would likely bring up competition issues. So there's a lot of complexity, and that's what easyJet is saying. They're saying, how practical is this in question? There's significant questions about the deliverables, and that's about the time, the complexity, and the cost of this process.

Karen Walker (14:20): In the US, of course, earlier this year, a big name in low cost carriers, Spirit Airlines ceased operations. It was in Chapter 11, it couldn't get out of that. It was partly blaming the high price of fuel, so it ceased operations. We didn't hear anything from Castlelake regarding coming in and taking that. Arguably, that could have been an ultra bargain. David, what are your thoughts on that? What's that indicate about Castlelake's motivations? Well,

David Casey (14:54): I think if you just go back to the SAS investment, it shows that it doesn't intend to buy airlines and own them indefinitely. It wants to identify opportunities where it believes value can be created, help to unlock that value and then exit when the time is right and that investment was matured. And I think with Spirit on paper, you might have expected a US-based aviation specialist to be interested when it collapsed. Obviously, there was an opportunity there to acquire assets at a distressed price, but I think Spirit and easyJet represent completely different investment cases. Whereas with Spirit, it was facing real deep structural challenges operating one of the world's most competitive domestic markets where you've got easyJet by contrast. It's not a turnaround story at all. It's profitable. It's got, I think it's about 4.7 billion of liquidity. It's got that valuable portfolio of slots, it's got the order book, it's got a growing holiday business.

(15:53): And so I think it's just looking more for a business where it believes it can unlock value and easyJet clearly fits that mold where Spirit didn't.

Karen Walker (16:02): Yeah, maybe one way of looking at it is that if they'd acquired Spirit, they'd have had a headache to deal with right from the beginning, which they don't if the deal goes through with easyJet, they could let the business keep running while they work out what they want to do with it. There's been a wave of another wave of European consolidation going through across the airlines and these involve major airlines like TAP Portugal, Air France-KLM, Lufthansa, et cetera. What are your thoughts, Victoria? Do you think that what's happening here with easyJet signals a potential similar consolidation wave involving the low cost carriers? There's a lot of them across Europe, and as you've just mentioned earlier, some big names there.

Victoria Moores (16:52): Yeah, I think potentially would be my response to that. I mean, this came a little bit sideways, this approach about easyJet, obviously it just emerged right at the end of the May and it's been very active since then. There has been a lot of speculation that the smaller European low cost carriers might be consolidated. Michael O'Leary is always keen to say that Wizz Air is going to get swallowed up any day now, but that really hasn't happened. So I think while yes, we could see some movement among the LCCs, and I think at the very least this suggests that easyJet's on the table, other investors will have seen how easyJet has reacted and responded to this. But I think that in terms of the way that the market is now, we've already got the significant players there. There aren't that many smaller players that aren't part of the business of a mainline carrier.

(17:44): So obviously you've got low cost operations theoretically from Air France-KLM, from Lufthansa, they're in the market too, but they're part of a bigger parent already. Going to be really curious to see how this goes. I think two tripping up points could be Stelios Haji-Ioannou, who is the founder of easyJet. Him and his associated companies, his family own about 15%. Whether or not they will be willing to go along with this process is yet to be seen. I haven't seen anything coming out of easyJet Group so far about that. And the other thing is this speculation, I'm going to underline the fact that it's speculation again from the analysts that I mentioned earlier, Robert Boyle, that Castlelake might actually look to break apart easyJet to sell off its fleet, its slots, to take its component parts because that's where a lot of the value lies.

(18:36): Would Stelios be willing to see easyJet broken apart and what would that structurally do to European aviation, particularly for Wizz and for Ryanair, if easyJet was all of a sudden out the market? I think they're very big questions.

Karen Walker (18:50): Yeah, good point on Stelios. He's quite a character, shall we say, and probably not the easiest person to deal with if he thinks the wrong thing is being done. David, what are your thoughts in terms of is this more potential consolidation focused on the low-cost carriers? Well,

David Casey (19:08): I think as Victoria said, I think in the low-cost segment, Ryanair doesn't need easyJet's business model. easyJet doesn't need Ryanair. They compete in many of the same markets, but they've got very different approaches. Potentially, this could signal that low-cost airlines are becoming attractive to a different type of buyer. So Castlelake isn't interested in creating a larger airline group. It's looking at easyJet as a collection of higher quality assets. So maybe it's more of a shift rather than being airline and airline consolidation. Maybe we'll see more of an interest from specialist investors who potentially believe that the market's undervaluing these business. So do I think it'll drive consolidation? Probably not. I think the large independent players are more likely to continue growing organically. But again, as Victoria said, maybe some of the smaller players could be targets.

Karen Walker (20:05): One last question for both of you and I know none of us know where this story is going, which is why it's interesting for us to be monitoring it. But Victoria, do you think Castlelake deal will go through?

Victoria Moores (20:20): They're clearly very, very keen. So when they started out, easyJet share price was at £3.82 and now the bid that's already been rejected was at £6.50. So they're really pushing to get this deal through their persistence over four offers shows that it's at least four offers. We don't know if something else might have happened since. So I think David's word of persistence is the one that's sticking with me. It does seem as though they really want this, so I'm not going to call which way it's going to go, but they do really want it by the looks of it.

David Casey (20:52): Yeah, I'm going to get splinters and sit on the fence because I think it's very hard to call at the minute. I think a week ago, I'd just said it was looking a bit more unlikely, but since then, I think we've seen a slight change in tone from the easyJet board. It's rejected the four offers, but it has agreed to open its books and give Castlelake some limited access to commercial information. I don't think boards usually do that unless they believe that a transaction is at least potentially possible. So the question now is whether Castlelake believes easyJet is worth paying 700 pence or more to secure and I'm sure we'll see in the coming days.

Karen Walker (21:30): The devil will be in the details as usual, but if there's nothing else, it's yet another good story that we can be monitoring and reporting on across ATW and Aviation Week as always. So thank you, David and Victoria. Thank you for joining me today and giving your insights onto this. Also, thank you to our producer, Cory Hitt, and of course, a huge thank you to our listeners. Subscribe to us via Apple Podcasts or however you like to listen so you don't miss a single episode of Window Seat. And finally, to all Americans everywhere, and I am one of those despite the accent, here's wishing you a very enjoyable July 4th holiday as America celebrates its 250th year of independence from those wily Brits. So thank you. This is Karen Walker, disembarking from Window Seat.