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Haji-Ioannou family: reduction in easyJet stake
Posted: 21 January 2013
Sir Stelios commented as follows:
Last week I sold 200,000 easyJet shares in the open market, representing 0.34% of my holding. Simultaneously, my brother and sister each sold the same number of shares. This means our combined holding in the company is now just below 37%, still representing an investment of almost £1.3bn. As a concert party, we have disclosed these sales to the company in accordance with the rules.
This token disposal of shares sends a clear message to our directors.
Since November 2008, I have been front and centre of a campaign to make the easyJet board more focused on shareholder value and less on top line growth. I had become increasingly concerned that our company had an expansion at any cost policy, built on ordering more overpriced aircraft from Airbus, a monopoly supplier. Back then the directors were arguing that other shareholders favoured a zero dividend policy and that it was normal to spend £300-£400m each year buying more aircraft - at the expense of profit margin.
Events since then have proven them wrong and following the replacement of certain directors, the rest of the board has now come round to my strategy of focusing on profit margin improvement rather than revenue growth.
I am delighted to say that my campaign has worked well for all easyJet shareholders. The share price has tripled within four years following the introduction of a dividend policy that pays out one third of post-tax earnings to shareholders. A more healthy 50% distribution ratio is now not too far away. While the board fought me tooth and nail, the market agreed with me by pushing the share price to an all time high.
However, not all is well. Management actions have resulted in unit costs rising by 24% since 2008. The only reason that the profits have kept pace is due to the average customer now paying 33% more than they did four years ago. Such price increases are only possible with a slow growth in fleet numbers. It is because easyJet has not bought more aircraft for some time that it is now doing so much better financially.
There is still one major concern that could screw up this financial success story: another aircraft order.
The current fleet of 217 aircraft is too big for the winter season (as seen from recent lower utilisation figures of flights per aircraft). It is also composed of brand new aircraft that will not need replacement for many years to come - certainly well beyond the tenure of the current directors.
If the board places another order for aircraft, it will destroy shareholder value into the future. If they place such an order now I will be looking to dispose of more of my stake before this happens.
It has always been my view since 2008, easyJet should have been run as a mature cash generative company in the current recessionary European environment. Instead of ordering new aircraft, easyJet should aim for a 10% profit margin, up from 1% four years ago and against the current level of 7%.
The alternative does not bear thinking about. A brief look back in aviation history shows a depressing trend of countless iconic airlines (once mighty names of the skies) going bust because their managements bought more aircraft than they had profitable routes to service.
Let’s avoid this happening at easyJet! I will be a loyal shareholder for the long term provided management doesn’t squander any more of our cash on new aircraft for at least the next 4-5 years.