EasyJet's acquisition of Go has created Europe's largest low-cost carrier and is the latest round in a race between the region's low-fare rivals to achieve greater market share across the continent

Low-cost carriers have never been shy of publicity. Only a couple of year's ago easyJet chairman Stelios Haji-Ioannou dressed in an orange boiler suit to gate-crash the first flight of Go when it was launched by British Airways. Now Stelios is again making headlines for boarding Go, although this time not as an unwelcome guest but as the new owner of the smaller low-cost carrier.

The headline writers are right to show an interest. The £374 million ($544 million) acquisition of Go is the first major piece of consolidation within Europe's still young low-cost sector. At a stroke it propels easyJet into the lead above rival Ryanair. On present standings, the combined grouping would have annual sales of over $850 million and more than 12 million passengers. What is more, in parallel with the Go move, easyJet has agreed a deal where it will have the option to acquire Deutsche BA, the UK flag carrier's German subsidiary which is in the process of turning itself into low-cost DBA. If consummated, it has the option to buy DBA at any time up to the end of March 2003. That would take easyJet over the $1 billion mark: big even compared against the older US carriers although not quite yet close to Southwest Airlines.

The Go buy is a also major step away from easyJet's own strategy of growing organically. It had bought a 40% stake in TEA Switzerland in 1998 as a way to establish a Geneva base, but this move is on a different scale.

Perhaps most interesting is what effects the acquisition could have on the relationship between easyJet and Ryanair, both independently fighting for the lead role in Europe's low-cost drama. To date, their networks have barely competed and they have rarely even flown out of the same airport. Up until now, easyJet has concentrated on building up services from its main London Luton base as well as Liverpool, Geneva, Amsterdam and recently London Gatwick. Ryanair has its main bases at fast-growing London Stansted and Dublin, as well as budding bases at a string of tiny secondary airports which it dominates in Europe. However, the purchase of Go will now give easyJet a major presence at Stansted, home of both Ryanair and KLM's buzz.

According to Stelios, the deal will "contribute significantly to our objective to become Europe's leading low-cost airline by strengthening our position in important target markets".

For its part, Ryanair says that it has long believed that the low-fares market would consolidate into two large operators. "We wish them well with these acquisitions, and I will be taking lessons in humility now that we are - for the time being - Europe's second-largest low-fares airline," says Ryanair's chief executive Michael O'Leary.  "However, since Ryanair's fares and costs are some 60% lower than those of the enlarged easyJet group we will still be the fastest growing and most profitable low fares airline, and we will continue to grow organically over time to become Europe's largest scheduled airline."

Scale advantage

Certainly the enlarged easyJet will gain a scale advantage over Ryanair. Based on the summer schedules lodged with OAG for June, easyJet and Go together would account for close to 3.8%of scheduled seat capacity in western Europe. That is around 25% larger than Ryanair and beginning to approach the size of the European networks of the smaller flag carriers.

There is still all to play for. To date the bulk of low-cost flying has been based around the UK market. The schedule data suggests that this summer low-cost operators will offer just under 28% of the seat capacity offered within the UK or between it and Europe. By contrast the share of low-cost carriers within continental Europe, excluding UK services, is a mere 3.6%.

There remain questions as to the extent to which the experiment will be repeatable elsewhere in Europe. If it is then the mathematics suggests that there is  potential for the low-cost carriers to double their current size, which is more or less what Ryanair and easyJet are betting on with their aggressive fleet expansions.

However, there are no guarantees. Mainline carriers have already begun to respond. British Airways, bmi british midland and SAS have all released lower fares and simplified products. The giant charter leisure carriers also appear to be waking up to the threat and gearing up to offer a response with seat-only products alongside their package holidays. It is worth noting that the big German charters already take up a sizeable slice of the intra-European scheduled seat market.

The Go acquisition also comes with a healthy price tag attached for easyJet, although the strength of its own share price will allow the group to fund the purchase with a £276.6 million rights issue of new shares.

The sale of Go comes just a year after it was bought out by its management in a deal backed by UK venture capitalists 3i for £110 million from BA. Go staff took an 18.5% share of the company at that point, with its chief executive Barbara Cassani the largest individual shareholder with 4%. She will leave the company after the takeover, as will chief financial officer Andrew Cowen. Chief operating officer Ed Winter will stay to oversee Go's absorption into easyJet.

The next step could then be the DBA, deal, moving easyJet into the heart of Europe's biggest domestic market. It will second three managers to DBA, pay €5 million ($4.6 million) towards the airline's transition to a low-cost model, and €600,000 per month until the option is exercised. The final price will be between €30-39 million depending on when easyJet exercises its option. Loss-making DBA operates on seven of the 11 trunk routes in Germany. With Ryanair too in contention in Germany, that could be the next interesting battleground to watch for everyone in Europe

Source: Airline Business