Why does Castlelake want to buy easyJet?
Budget carrier has large fleet and expensive airport slots, while its share price has been hit by Iran crisis
As the Iran war sent airline share prices tumbling, the boss of easyJet was “not surprised” the carrier had attracted a large number of short sellers betting against it.
“The share price has moved against all airlines since the start of the conflict,” Kenton Jarvis told the FT in early March. “We expect the markets to move and see an opportunity.”
Two months later, US private credit group Castlelake believes it has seen an even larger opportunity: to bid for the British low-cost airline, which has long attracted takeover speculation.
EasyJet’s share price has fallen by nearly a third in the past 12 months — the worst in the European industry. The Stoxx Europe total market airlines index is up 10 per cent in the same period.
EasyJet is down by a staggering 75 per cent since its peak 11 years ago.
“EasyJet is the animal at the back of the pack, they are most likely the next to be picked off,” said Andrew Charlton, an analyst who runs Aviation Advocacy.
Castlelake’s statement on Friday evening said its plans were at an early stage and that there is no certainty of a bid.
Yet the announcement sparked discussion from industry executives, analysts and investors as to what the US jet financier wants with the UK’s orange airline.
Possible options include continuing to run it as an airline, operating it with a view to selling to another airline — as Castlelake did last year when Air France-KLM took a majority stake in SAS — or breaking it up.
Castlelake’s interest could also flush out other bidders — possibly a long-speculated offer from British Airways.
BA’s owner IAG has said it expects consolidation in the industry and it has already been approached by several airlines, although several people close to the company say it is not in discussions with easyJet.
One explanation for Castlelake’s timing is pure opportunism. EasyJet’s falling share price puts its valuation at £3bn, while it has £434mn of cash on hand.
“This is the time if you’re going to strike,” said one airline adviser.
“Buying aviation assets now isn’t a daft moment,” said Andrew Lobbenberg at Barclays, partly because easyJet’s assets are “attractive and undervalued by share price”.
Additionally, Castlelake, which has long experience lending to airlines and investing in aircraft, will free up cash when the sale of its stake in SAS to Air France-KLM completes. The transaction is still awaiting regulatory approval.
EasyJet has 70 per cent of the fuel it needs for the summer but it will face even higher costs if global oil prices stay elevated. “Although they will have hedged for this summer, the concern is that oil prices stay high,” said one airline adviser.
Analysts expect easyJet’s low-cost rival Wizz Air is more likely to fail in the medium term, which would free up routes, planes and passengers.
Part of easyJet’s vulnerability is its business model. It started out in 1995 with the aim of making short-haul flying as cheap as buying a pair of trousers, but has found itself squeezed in recent years.
Ryanair and Wizz Air offer even fewer frills and fly from cheaper airports — keeping their costs lower — while traditional carriers such as British Airways have pared back their short-haul offering to look far more like a low-cost carrier.
“EasyJet is probably the most exposed of the European airlines because of its hybrid model,” said Charlton. It is “just a ‘mini-me’ for the EU long-haul legacy carriers” but without offering the business class seats that bring in extra revenue.
EasyJet’s founder Sir Stelios Haji-Ioannou still holds about 15 per cent of the company’s shares.
The EU’s rules prevent a non-EU owner from holding a majority share of any EU airline. These still apply to easyJet as the UK remains in the EU flying area, despite Brexit. But the rules are malleable. For example, a deal would be unlikely to be blocked by the European Commission if the alternative is an airline failing, analysts say.
The company has a medium-term target of making £1bn of profit, aided by its holidays business, which has been growing strongly. But analysts expect it to make less than £100mn this year, down from £665mn a year ago, and that 10-figure goal “looks distant today”, said Lobbenberg at Barclays.
Its price/earnings ratio for last year is above the European average, but below that of global airlines.
The business should be a “favoured investment opportunity for when there is a credible peace in the Iran conflict”, Lobbenberg said.
Perhaps its fleet is the attraction for Castlelake. EasyJet has 356 aircraft, with another 287 on order. It will receive roughly 90 of these in the next three years. Some 42 per cent of its aircraft are leased, though it owns almost all of the next-generation models, the A320neo and A321neo.
Castlelake is one of the airline’s lease owners, people close to the business said. Even with only its current aircraft, analysts say the value of easyJet’s fleet is greater than the airline’s market capitalisation.
The industry is short of planes after years of slower deliveries from Boeing and Airbus, forcing many airlines to run older aircraft.
However, this period of scarcity is beginning to ebb. Deliveries are increasing, while the bankruptcy of US budget carrier Spirit Airlines freed up more than 100 planes — all narrow-body aircraft used by easyJet and other short-haul carriers.
“Narrow-body supply is not that tight anymore after the bankruptcy of Spirit and given poor demand overall, so it is not very easy to flip that fleet,” said one airline investor.
EasyJet has landing slots at several prestigious airports including Brussels, Frankfurt and Paris CDG, as well as a dominant position at London Gatwick. Its UK spread means it is the default short-haul local carrier for many British citizens for whom BA’s Heathrow base is too far away.
John Strickland, who runs JLS Consulting, said a bid from Castlelake “suggests confidence in the low-cost model in Europe, in contrast to the US, and equally in easyJet’s position as second largest low-cost carrier here, with a valuable slot portfolio at numerous primary airports”.