Sir Stelios Haji-Ioannou has opened fire with a new round of PR in letter format. Made public, it’s an open invitation to all of the airlines multiple shareholders to rebel and agree with him, forcing easyJet’s hand.
In a statement released by Sir Stelios today (April 6) he said:
My main objective is to terminate the £4.5bn contract between Easyjet and Airbus for 107 additional useless aircraft. That is the only way to preserve the value for all shareholders and all the bondholders too.
Easyjet’s market value (all the shares), is hovering around £2 billion. The Haji-Ioannou family owns about 34 per cent of the shares, wit the other 66 per cent held amongst many individual shareholders and various pension funds paying out pensions.
I will now seek to enlist support of these other shareholders in terminating the Airbus contract.
The net book value of the assets of Easyjet (net of liabilities) was £3 billion as at 30 September 2019. Even allowing for trading losses during the current grounding there are still many good assets inside Easyjet and we must not allow the current directors to squander our assets by paying Airbus for these unwanted new planes.
Easyjet has also borrowed c£1.3 billion from bondholders (pension fund money again) that will need to be repaid in full over the next 2-5 years. Today these bonds are trading at 20-30 per cent discount to their original value. This means the market feels that Easyjet may become insolvent in that timeframe, all whilst paying Airbus c £1.35 billion for new aircraft in the next few months (the same value as all the bonds outstanding today).
Sir Stelios said that the prediction for running out of money around August:
“is based on the optimistic forecast published by the house stockbroker of easyJet (Neil Glynn at Credit Suisse on April 2, 2020) showing a cash short fall (negative balance) of £164m by September 2020”.
He added that the forecast was based on “wildly optimistic assumptions that the Easyjet fleet will return to the skies in June, bringing in profitable revenues of £1.5bn in the summer months” – something which Sir Stelios referred to as “pure fantasy”.
It must be noted that almost every country in Europe has now closed its borders to foreigners. Nobody really knows when they will open again. And even then, nobody believes that people will be willing to undertake foreign travel in such large number by June 20.
Fear has now taken over human behaviour when it comes to any form of foreign travel. Each country will want to keep others out for much longer than the date that their own local national lockdown ends. I think that Easyjet at the end of national lockdowns will feel more like a start-up trying to find a few profitable routes for a few aircraft at a time. How many Brits will want to fly to northern Italy or Spain on holiday this June? Not many I think.
Sir Stelios said he was calling for two directors to be removed from the Easyjet board, including Chief Financial Officer Andrew Findlay.
If Easyjet terminates the Airbus contract, then it does not need loans from the UK taxpayer and it has the best chance to survive and thrive in the future with some injection of additional equity provided for by the markets (pari passu to the existing shareholders).
But if Easyjet stumbles along whilst taking UK taxpayers money as loans only to pass it on to Airbus, it will have to raise fresh equity anyway in the next 3-6 months – reducing the value of our current shareholdings to close to zero. In any event no rational investor would be buying new shares in Easyjet if the money will be used by easyJet to pay £4.5bn to Airbus for new planes it simply does not need. I will certainly not be throwing good money after bad. For the avoidance of doubt, I will not inject any fresh equity in Easyjet whilst the Airbus liability is in place.”
The bold is mine, because this is the crucial part of the letter. The rest is justification and persuasion, the fact he is making it quite clear he is prepared to let the airline sink if its allowed to carry on (and it cannot raise money from its shareholders unless 70% agree – he owns 34% so the most they can do without him is 66%),
Now while he might imply he would let it drown – he can afford for it to vanish after all, and still will be sitting on the fortune he’s made from it, I don’t think he’d go that far.
This is more about getting the company to renegotiate with Airbus, to put off the obligations to take delivery, because in the end it will need new aircraft, it will have to move forward, just not now and not in such a big way. LCC’s work on keeping maintenance costs low, and they do that by buying new aircraft with minimal service requirements . LCC’s have been the driving force behind aircraft like the 737MAX and the A320Neo.
So in the end a compromise may well be reached, but it won’t be easy, and it will depend on what the other big shareholders – the pension funds especially, decided to do. They have to pay pensions monthly from funds they receive from profits on stock holdings, and they need to constantly invest to maintain those payments. Sir Stelios is often regarded these days a a troublemaker – even if he does have a valid point.