City Insider: Stelios is right – forget growth and pay out

City Insider - A City perspective on the travel industry from FT journalist David Stevenson


Lowcost rivals easyJet and Ryanair are both grappling with growing pains – but it’s the Irish carrier that has the right approach, says David Stevenson


Over the last few weeks two of the travel industry’s favourite rogues/heroes have been shouting loudly about cash, and particularly how they should return lots of the filthy stuff to their shareholders.


One of those characters – Sir Stelios – isn’t actually running the airline anymore, whilst the other – a certain Mr O’Leary – remains very much in the driving seat. But their message is remarkably similar, which is amusing considering how much they clearly dislike each other.


Their joint message is that if you can’t grow the underlying business any faster than the current organic growth rate, then you should return the cash to the people to whom it belongs, i.e. the shareholders (and of course it helps that Sir Stelios is one of the biggest shareholders at easyJet).


It’s easy to dismiss this as the usual bluster and histrionics we’ve come to expect, but there’s a profoundly important story lurking here: successful airlines should dump all the talk about massive capex spend and get down to the business of managing sedate growth, cutting costs and turning into dividend cash cows that are slightly more interesting than utilities.


EasyJet’s management may want to spin the story of growth, but I’d wager most institutional investors now think that Sir Stelois and Mr O’Leary are right. Travel needs to generate its own sustainable cash flows and start paying back all the money invested in it over the last few heady decades of structural growth. 


I was brought up on Sir Peter Templeton’s famous challenge to US institutional investors that to understand a potential purchase of shares you first have to kick the tyres of your prospective business.


I’ve kicked the tires relentlessly and all I can say is that both easyJet and Ryanair do what they say: provide decent quality, cheap flights to a mix of recognisable and bizarre airports all around Europe at a fraction of the cost of over-priced national carriers.


Personally, I can’t quite see why we all collectively hate Ryanair so much or why easyJet is the poster child that rarely does any wrong.


More to the point, Ryanair has got its City strategy right whereas easyJet is clinging to the mantra of growth combined with stinginess in the dividend department. 


If I had a prize for most sensible comments from a leading chief executive, I’d award them to Mr O’Leary. Here’s an extract reported in last year’s results from his (ultimately fruitless) ‘conversation’ with Boeing.


“We see no point in continuing to grow rapidly in a declining yield environment. … We would prefer to grow, but if Boeing doesn’t share our vision, then I believe that Ryanair should change course before the end of this fiscal year and manage the airline over the next three years to maximise cash for distribution to shareholders.


“If we cannot invest our surplus cash efficiently in new aircraft, then we should distribute it to shareholders.” 


Funny old idea that – give cash back to the shareholders. What a dreadful thought.


Ryanair isn’t exactly shrinking, but it’s completely plausible that it’ll stick to its 300-strong fleet and try to squeeze the net margin up to about 25% by charging the rest of us for every little thing imaginable.


Rather like Thomas Cook and Tui, it could also start to ride out the consolidation cycle, push smaller airlines out of business, creatively manage slow growth and then, god forbid, usher in gentle decline. 


Along the way of course Ryanair will hand back lots of dosh to its shareholders – €500 million by the end of this year if all goes to plan, which should mean that a grand total of €846 million will have been paid over the last three years.


There’s also the chance that another €500 million will be paid back before the end of 2013. Over the same period easyJet have paid back zip, nada, a big fat zero.


Its management clings to the idea of buying yet more aircraft and growing like maniacs, but the reality is that smart companies accept the idea that growth may be more subdued but that they also need to pay out lots of cash to shareholders to compensate them for volatile stockmarkets.


It’s the new normal of this second decade of the new century. It’s about being realistic about how much capital you can commit to growth, and making sure that the dividend is paid before anything else.


That change in investor attitude can already be seen in the way that the markets have rated the big low-cost airlines – and British Airways which is trying to wrench its model in the same direction.


Since the dark days of late 2008 Ryanair’s shares have consistently outperformed easyJet’s (and BA’s) and in the period either side of the results back on June 1st (when the cash handout was announced) the shares have shot up from a low of about 301p to 363p.


In fact I’d suggest that Ryanair’s shares would be a great deal higher in price if it wasn’t for Mr O’Leary, who isn’t exactly loved by an adoring army of fans in the City.


Personally I have huge amount of professional respect for O’Leary – he’s a tough, wily operator who generates great publicity, but for a growth company.


As Ryanair makes its shift to stodgy, boring cash cow he’s possibly not the right kind of person to make shareholders feel special and loved.


He’s the main who gets publicity, good or bad. Cash cows have milder fellows leading at the top and O’Leary might be better moving on to ‘new projects’ like rescuing Ireland from bankruptcy.


Talking to City types I’d suggest the current guestimate for the “Get Rid of Michael” bounce might be worth close to 15% – ‘Cash Cow Devours Growth Maverick’ might be the headline.


I’d also suggest that this kind of City talk could be deadly for the current easyJet management – Sir Stelios might actually be right and if the management was to give in, cut capex and start to institute a 20p dividend backed by a 50p special cash hand out, we could also see a 10 to 15% bounce in the share price over the next few months.


Or maybe they’re keeping the cash to pay for the brand/design agency to come up with a replacement name for easyJet.

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