Aimee Turner: August 2005 Archives

It is not often that an airline stock sets the market alight, but that is exactly what the surge in easyJet's share price since the third quarter of last year has done. Back then, it was trading at just above the 120p mark. It is now changing hands at around 300p.

The reason for this massive increase is not hard to fathom. Iceland's FL Group, the owner of Icelandair, started buying into the stock back in October, and despite the hike in easyJet's share price, is still buying, with its stake now over the 13% mark.

There is little doubt then about the main reason for the increase in the share price. While easyJet's new investor relations team may be doing a better job of managing expectations, the airline's financial performance has been solid rather than spectacular. It is the prospect of a takeover that has got the market excited.

When FL first started to buy into easyJet, few saw any rationale in the move, other than the fact that, in hindsight, it was a good financial investment. Indeed, if FL sold out today, it would make a handsome profit.

Most analysts are still sceptical that a successful takeover could be launched, but could they be wrong? FL is one of three Icelandic companies, run by fiercely competitive entrepreneurs, who have been trying to outdo each other on the acquisition trail. These are Hannes Smarason, chairman of FL Group; Magnus Thorsteinsson, chairman of Avion; and Palmi Haraldsson and Johannes Kristinsson, who control Fons Eignarhaldsfelag.

Avion, the parent of wet-lease company Air Atlanta and UK charter operator Excel Airways, has just taken a stake in US charter airline Casino Express.

Fons Eignarhaldsfelag, meanwhile, is in the process of adding Denmark's Maersk Air to its stable, which already includes recent acquisition low-cost carrier Sterling and Icelandic Express.

The owners of the three companies are fiercely competitive with each other, and Fons Eignarhaldsfelag's rapid build up of a low-cost presence in Scandinavia will not have gone unnoticed by Smarason.

Smarason has not ruled out the possibility of buying easyJet. He told Iceland's Channel-2 television channel in mid-August that he would not exclude the possibility of a bid for easyJet, saying "anything can be bought".

The chances of a hostile bid being successful seem remote, however, given that easyJet founder Stelios Haji-Ioannou and his family control 41% of the carrier. As one analyst puts it, "If it's a case of a race to the 50% mark, there will only be one winner."

So, any bid would almost certainly have to have the blessing of Stelios in order to succeed. Stelios has said that he has no plans to sell, not surprisingly, perhaps, describing the stock as "undervalued". Stelios, of course, has developed interests in a number of other areas and recently opened the first easyHotel. Will he be tempted to cash in his easyJet shares to support other ventures?

As well as the need to persuade Stelios to support a deal, Smarason would also have to tackle the issue of brand ownership. Stelios owns the easyJet brand, so some sort of arrangement would have to be made here.

Then there is the little matter of strategic value. Few see much in the way of synergies. However, in the event of a successful takeover, Smarason would, if nothing else, give Thorsteinsson, Haraldsson and Kristinsson something to think about.  

Rod Eddington, it seems, will leave British Airways on something of a high. Financials for the June quarter, the last that he will deliver as chief executive, were fairly impressive, with net profits doubled on the back of some strong revenue gains. See related article There are still some challenges ahead for BA, but Rod is now handing over to Willie Walsh a group in much stronger shape than the one that he inherited back in 2000.

In large part, the latest set of figures reflect a general recovery in premium flying that has begun to lift other European majors too. BA benefits particularly from a stronger US dollar given its strength on the other side of the North Atlantic. Yields were up by 1.5% in the quarter!

But his real success has been in bringing BA out of its funk as a legacy carrier struggling to come to terms with the new world order and its own role in it.

The European operations under intense low-cost competition were bleeding BA dry and that has largely been stemmed, although there are still no great profits to show. More than that, Rod has helped BA to regain its sense of ambition, not least pioneering on the web. It is now competing online with the best of them and that showed through too in the latest quarterly results: selling costs were down by over 20%, representing a saving of more than $50 million dollars. That more than paid for the quarter's wage increases!

Willie Walsh himself is no stranger to reinvigorating an ailing legacy carrier as his transformation of Aer Lingus shows. Will he succeed at BA? With a fair wind, I reckon he will. Like Rod, he's an affable guy but shrewd too. I saw him a few weeks ago and he certainly seemed all geared up to go after a few months in the background. Rod's leaving party is on 6 September, so there's not much waiting left!

"We'll get them in the end!" So Qantas chief executive Geoff Dixon told us a few weeks back, talking of JetStar Asia's bid to absorb fellow Singaporean start-up Valuair. It seems that he was right. His low-cost subsidiary has indeed taken over its erstwhile competitor:

That should come as little surprise. Singapore's low-cost market was clearly overcrowded and Valuair's future was in question virtually from the get go. In any case, Temasek Holdings, Singapore's investment national arm, owns stakes in both JetStar and rival Tiger Airways, as well, of course, as a majority in Singapore Airlines. They like to keep things in the family in Singapore. For its part, Valuair's chairman was a former head of Singapore Airlines.

More interesting, was how bullish Geoff appeared, when we met up up with him, on the prospects of spreading the JetStar Asia franchise across other parts of the region, again partnering with a local (maybe government?) partner. Lead candidates would seem to be the likes of Malaysia, Indonesia and the Philippines, with potentially large local markets.

If low-cost follows the same trajectory in Asia-Pacific as it has in North America and Europe then we should expect a dash for growth, followed by the emergence of just two or three lead players. In Asia that game is still wide open, but the smart money would for one of those positions must be on Air Asia, which as Tony Fernandes points out has the lowest seat unit costs of any carrier on the planet. Seems as if Qantas may be angling to be up there too.

Technorati tag: JetStar Valuair Qantas Airlines