EasyJet: The latest episode

Andrew Lobbenberg from RBS describes easyJet's plight as a combination of a soap opera, comedy series and horror show.

And our latest episode ended on a real cliff hanger, as founder and former chief executive Stelios (pictured left) quit the easyJet board (although he and his family still owns a 38% stake, so they won't be leaving the cast just yet). Cue dramatic music and roll the titles, before switching to the evening news (where, undoubtedly, you'll find more of the same).

But this plot rings a bell. Stelios is objecting to what he believes is an over-ambitious growth rate, at 7.5% per year. Haven't we had this storyline before? Yes, we have (albeit without the dramatic exit).

Stelios (read his resignation letter here) now wants to convince the other shareholders to reject the easyJet growth strategy, renegotiate the Airbus deal and instead stick with its 190-aircraft fleet (easyJet has outstanding orders for another 59 aircraft).

But Lobbenberg and his team disagree with the charismatic founder's thinking, stating flatly: "We do not share Stelios' view that the optimum path for easyJet is to hold at 190 aircraft." RBS highlights the fact that easyJet and Ryanair's market-leading aircraft deals, struck in the wake of the events of 11 September 2001, are "key structural advantages for these two carriers over peers" with "very considerable value".

It adds: "For easyJet to walk away from its competitively priced aircraft stream before it is exhausted would appear a sub-optimal strategic move in our view. EasyJet has what we believe to be the best narrowbody aircraft contract that any customer has from Airbus." By comparison, "Ryanair is in a strategic quandary right now as it is running out of its cheap Boeings and faces this question now before the products from other suppliers are defined. EasyJet is not and it happily has time to wait and see how technology and products develop, before availing itself of competition amongst aircraft suppliers".

Stelios has laid down the rationale behind his thinking. He claims each additional aircraft "progressively dilutes margins and destroys wealth", citing a drop in margins from 10% a decade ago to 1-3% today, 10 years of "flatline" share price growth and "zero dividends" as evidence. (Check out his share price vs fleet growth chart here and draw your own conclusions).

He goes on to accuse easyJet management of "relentless growth in aircraft numbers at the expense of any profit margin increase" and of "squandering shareholders' funds", questioning: "How can you buy 200 aircraft with shareholders' money and create no wealth for shareholders?"

Well, it seems the "flatline" has now been disrupted. With the combined effects of this new rift and the ash crisis, we have seen easyJet's shares lose value. As RBS says: "We thus seem set for a messy few weeks, if not months of fighting, with management and the board being distracted from optimally managing the company."

We've already seen Stelios launch a public verbal attack on outgoing easyJet chief Andrew Harrison. Perhaps the next twist in this industry soap opera is that Stelios and Ryanair chief executive Michael O'Leary will discover that they actually agree on something.

In our January edition of Airline Business, Michael O'Leary (in his unique style) told us how he sees a changing model for Ryanair, now it has reached maturity.

And, in closing, Stelios says: "The low-cost airline model is maturing, and management needs to now adopt different priorities to take the business forward. To date, easyJet management, supported by certain other board members, have refused to do this."