City Insider: easyJet should focus on margin and grow gracefully

David Stevenson believes analysts and the media focused on the wrong thing when assessing the low-cost carrier’s recent management statement

EasyJet’s interim management statement from last week proved to be a curious affair with most reporters and analysts asking what I think are the wrong questions.

The analyst community picked up on the decline in ancillary revenues, noting that travellers were rebelling against check in charges, choosing instead to take on their briefcases and dolly trolleys.

By contrast the broadsheets were tempted to dwell on the increasingly “unexceptional exceptionals” – noting that the industry is great at excuses.

This Christmas it was snow and BAA incompetence, but every six month’s some new excuse seems to come along to justify the inevitable “unexceptional exceptional” hit.

Both of these are valid criticisms although I don’t think that either will be keeping easyJet chief executive  Carolyn McCall awake at night.

EasyJet’s fingering of weather, disasters and infrastructure ineptitude is in a fine tradition and practised by all the big players, as well as the government.

Equally the decline in baggage revenues can’t be enormous surprise to anyone who’s raced to get on a flight first so that they can fit their dolly trolley in the overhead locker.

I’d suggest that those lost revenues will be more than made up for by the growing use of easyJet by business travellers with their Speedy Boarding Plus cards – the holidays packaging business may also prove to be a long-term success, compensating the airline for lost baggage revenues.

The bigger question for me though is the simpler one – why bother growing by spending more money on expensive capex like new planes?

Very few analysts and business leaders like asking this question except perhaps awkward types like Mr O’Leary and Sir Stelios.

Constant growth in EPS is the mantra and the conventional way of doing this seems to be to add more supremely expensive planes to your fleet.

Based on numbers from the Interim Management Statement, the number of planes is due to increase from 196 (sept 2010) to 220 (September 2013).

This isn’t a massive increase to be fair yet each of those aircraft is heinously expensive – each million pound spent on those shiny new beasts is one million less paid out to shareholders in dividends.

Crucially one needs to question this decision to expand the fleet on two very distinct grounds.

The first is the short term one – the tactical decision based on market place data. Although costs per seat are still falling, the airline is still very much a hostage to fortune to oil prices with only 70% of full year jet fuel requirements hedged.

Crucially fleet utilisation only grew by 2% over the period, although countries like Germany, France and Switzerland showed some sizeable traffic increases.

All these numbers might tempt the observation that more focus should be given to closing slow growing routes, with redeployment of the existing fleet to growth hot spots.

This shouldn’t be a massive problem as the great beauty of the low cost airline model is that decisions can be taken quickly and with brutal effect.

The bigger strategic question is even more awkward. I can’t quite understand why easyJet want’s all these new planes, given that overall organic growth is still fairly patchy and slow.

One can absolutely accept that more business users will opt for easyJet, and that new areas within Europe offer great opportunity but surely these can be accommodated within the existing fleet.

Looking at easyJet’s statements gives me a sense of déjà vu – outfits like BA used exactly the same rhetoric in their glory days of growth in the 1980s and 1990s.

Yet they now spend all their time pruning excess capacity and trying to buy operators with new hubs so that they can better utilise their massive fleet.

The case for extra plane capacity hasn’t been properly made and these numbers will do nothing to silence the doubters. Maybe Stelios and O’Leary are right afterall – it’s better to grow gracefully, focus on the margin and pull in the cash.