Fresh from its massive new aircraft order, chief executive Ray Webster is confident that easyJet can win Europe's low-cost battle
Just a few years ago, nobody would have believed that the largest aircraft order of the year would have been placed by a carrier operating out of a prefabricated building outside the UK's Luton Airport. EasyJet's much heralded deal with Airbus for 120 A319s, with an option for another 120, is an indication of just how far the carrier has come since it started just seven years ago - and how far it intends to go over the next decade.
"When I joined we had two aircraft," chief executive Ray Webster recalls. "I thought six-to-ten was a reasonable target to aim for - an idea everybody thought was crazy." When this goal was reached, Webster saw 30 aircraft as an achievable goal. "Lots of people were saying 'Webster's gone crazy'," he remembers. "Now I'm telling people to think of us as a 300-aircraft carrier."
During this period, charismatic founding chairman Stelios Haji-Ioannou has been the public face of easyJet, adopting a high-profile publicity strategy not dissimilar to that of Virgin Atlantic's Richard Branson. Stelios is a rare visitor to the carrier's easyLand headquarters these days, as he concentrates on developing the easy brand in other areas ranging from car rental to the Internet. He has been easing himself away from the carrier since the highly successful initial public offering in December 2000 and is due to step down as chairman next year.
There is no doubt that Stelios and Webster were a well-matched team. Stelios had the creativity and ambition to conceive the easyJet idea. Webster's more methodical and pragmatic approach ensured it became a reality. He has always been the brains behind the operation, focusing on the day-to-day running.
Webster brings a totally different personal style to the job compared to Stelios. He is very much an industry man, spending 27 years at Air New Zealand (ANZ). He joined the then-fledgling easyJet in 1996 after ANZ management rejected his plan to set up a low-cost subsidiary. He gives the impression of someone who enjoys the job - an essential quality for a manager who spent months working round the clock in the run-up to the Airbus deal. Although not cast in the larger-than-life Stelios mould, Webster in many ways embodies the easy image with his calm, democratic style.
Despite the changing of the guard, the youthful, irreverent dotcom style remains firmly in place at easyJet, without a suit to be seen in the building. From the outside, easyLand resembles the sort of temporary structure you see on a building site - an impression intensified by the fact that it is being extended to house the extra staff being taken on with the purchase of Go. This paints a dramatic contrast to the grand headquarters of most European flag carriers, and in many ways personifies the difference in cultures between them.
Inside, the open plan offices see management and telesales staff at the same type of desk. Webster's is in the corner of the building facing away from the office, where he can be seen by most of his staff.
Strategic decisions
The last year has been a hectic one for Webster and his management team - the merger with the British Airways low-cost subsidiary Go, the possible take up of an option on BA's German subsidiary DBA and the A319 deal represent key strategic decisions. However, Webster firmly refutes the suggestion that management took its eye off the ball in the summer when the carrier was hit by a series of delays blamed mainly on a new, unworkable crew rostering system. He admits that easyJet was caught out, but insists the whole affair was overblown. "We are a much larger target for the media now," he says.
The seminal moment was the signing of the Airbus order, which was preceded by months of intense discussions. This not only sees the carrier move away from the Boeing 737, the previous low-cost workhorse, but also splits the carrier's fleet between the two manufacturers in what many saw as a risky move.
EasyJet was due to replace its older 737-300s by May 2004 which, given a two-year lead time, would have meant taking a decision in the first half of the year. However, in October 2001, Boeing came to easyJet with what the manufacturer described as "the deal of the century". Webster wasn't so sure. "We found it difficult to believe that this was the best we could do," he says. Airbus asked to be considered as well, so easyJet decided to start a proper bidding process between them.
The carrier had to decide whether a mixed Airbus/Boeing fleet was feasible. "An airline of our size should be able to operate different aircraft," Webster says. "The equation we had to look at was how much competition between suppliers reduced the cost base, versus how much the increased complexity increased it.
"The aircraft bit was relatively straightforward," Webster says, as both types met their requirements. Airbus agreed to increase the number of seats in the A319 from 145 to 149. "The trouble was we couldn't pin down maintenance costs." Airbus eventually agreed to ensure that maintenance costs are no higher than they would have been if easyJet had gone with the 737-700 option. Easyjet is to put out a tender for the maintenance contract soon.
Cost guarantees
Similarly, Airbus has agreed to guarantee the introduction of the A319s will not be any more expensive over the first two years. "I wasn't prepared to damage the profit & loss account during the introduction period," says Webster. "It wasn't until this was agreed that finally we could go ahead."
Webster claims that the risks of going for a split Airbus/Boeing fleet are less than many observers believe. "We had to dissect the business model and ask ourselves what the was the impact of a second type. The answer was surprisingly small." He says the carrier is incurring more costs with its split between the older 737-300 and new-generation 737-700 than it will in the long term with its A319/737-700 divide. For instance, he points to the fact that 30% of easyJet pilots are only certified to fly one or other of the 737 types.
The final decision was all down to price, however, and what is clear is that easyJet negotiated itself a very good deal. Webster says that speculation of a 60% discount is "a bit ambitious, but not far off". He sounds genuinely amazed when he says: "I've been buying aircraft for 20 years and I've never seen anything like it. I think it's unrepeatable." The current list price for an A319 is around the $50 million-mark.
EasyJet estimates a 30% discount compared with the price-per-seat on the deal signed four years ago with Boeing for 15 737-700s. Webster goes back to the original cost benefit equation to demonstrate the advantages to easyJet, however. "What does it do to the cost base?" Despite the added complexity, he estimates that the cost base will improve by 10%. "We believe that you can treat aircraft as a commodity. At the end of the day, what is important is how much profit you make."
Presuming Webster has got his sums right, this presents incredible opportunities for the carrier. "We could increase margins from 12% to 22%," he says. "Or we could have more flexibility in how we develop the airline. We could have lower fares, or expand the airline, taking on the competition."
Webster is sceptical of the claim by Airbus that they are making money out of the deal, and makes it clear that easyJet knew Boeing would not match their price. "We knew Boeing would be more expensive. They are more conditioned by the capital markets and management have very strong corporate incentives." He also points out that "Airbus were desperate to get into the market. They lost the Ryanair deal by a whisker, and then they lost Go."
The latter announced an exclusivity deal with Airbus on the morning that easyJet's announced it had bought Go from UK venture capital firm 3i. "Someone must have had a sense of humour on that one," Webster says. The deal between Go and Airbus was scuppered by the sale of Go to easyJet.
EasyJet took a close look at Go when BA initially put its low-cost subsidiary up for sale in 2000, but elected not to go ahead at that stage. "We decided it was too risky," Webster explains. "We were preparing for an IPO at the time. If we had gone ahead with the deal, we would have had to delay it by as much as two years. Stelios was saying 'can we do it?' I said 'no way'." As Webster readily points out, if the deal had gone ahead it would have meant trying to launch an IPO in today's market conditions - the worst in decades.
EasyJet considered teaming up with venture capitalists 3i when the latter made its bid for Go. Finally, this year, a deal was struck. "The feeling was, if we were going to put two airlines together, this was the time to do it," Webster explains. "We initiated it." He notes that at some point 3i was going to have to sell the airline or have an IPO. "After an IPO, it would be impossible to put the two carriers together."
Having gone ahead with the deal, Webster expects the integration process to be completed by the end of the first quarter of 2003. There will be a single easyJet brand before the end of the year, while the Go schedule has been put on the easyJet booking system and a single operations team is being put in place.
"Over the next 10 years, the Go deal will add value of six times what we paid for it," Webster predicts. "The real economies of scale have been in marketing." Low-cost carriers devote a much higher proportion of their cost base to advertising than major carriers. "We also have much greater purchasing power," he says, pointing to the Airbus deal. There are also benefits to route development, he points out. "There is less need to open up new cities. Paris is our first new city in a couple of years - and it is expensive."
While the Go integration has gone relatively smoothly - "it was a doddle," Webster jokes - there is still work to be done if an option on DBA is to be taken up. The key issue is convincing the workforce to throw their lot in with easyJet. "The top management are on board and so is the consumer," says Webster, The German consumer is no different from any other. There is a misconception that everyone drives a Mercedes."
He admits, however, that convincing the labour force has not been easy. "There are some tough hurdles. People are a bit unsettled." He makes it clear that pilots will have to rip up their current contracts if the deal is to go through. He is keen not to leave the impression that easyJet is cooling on the idea of taking over DBA. "The overall spirit is there. The vision is there. They are saying that they want to be part of easyJet."
He claims there will be few, if any, job losses. "The problem with DBA is that there are too many people and too few aircraft. We will introduce more aircraft and use them efficiently." He adds: "We want it to operate as a German company, with German employees, carrying German passengers." But he warns: "We are not prepared to support an acquisition in Germany if it doesn't comply with the easyJet model," and adds: "The staff know there is no future for DBA if the deal doesn't go through." Decision day for DBA will be in August 2003, when easyJet will decide whether to exercise its option.
Even if it decided not to go ahead with the DBA deal, there is no doubt the carrier has set course for a rapid pace of growth for the next ten years. Webster is quick to point out that there is some flexibility built into the deal with Airbus, which means that easyJet can grow at a slightly higher or slower rate than the average of two new aircraft per month.
Differentiated service
EasyJet has positioned itself as a higher-quality product than Ryanair, Europe's other major low-cost carrier. In general, easyJet has a major airport on one leg of the journey, in contrast to Ryanair, which sticks rigidly to secondary airports. EasyJet is building up a hub at London Gatwick and is looking to do the same at Paris Orly, neither of which is exactly a secondary airport. Webster believes people will be willing to pay a premium to fly to a convenient airport. "The cost base has got to be on cities people want to fly to."
EasyJet has even been overbooking, a tactic not normally associated with the low-cost sector. Webster says that this is restricted to some busy Friday night flights, and is necessary to give business travellers the flexibility to change their itinerary. He claims only a handful of passengers have been affected.
Despite this, he refutes the suggestion that Ryanair is the true European heir to the USA's Southwest. "Being like Southwest is about being pragmatic and focusing on markets," he says. "What's important is the sustainability of the business model." He points out that, like easyJet, the US carrier is not afraid of flying to major airports, such as Los Angeles International. He insists Ryanair and easyJet can co-exist. Again pointing to the USA, he says that Southwest only covers around a third of the market, while JetBlue focuses on the East Coast.
EasyJet is also increasingly coming into competition with mainline carriers as the latter have reduced their fares on short-haul flights in response to the low-cost challenge. Webster refutes the suggestion that easyJet is in danger of being squeezed between Ryanair and the majors, arguing that the prices being offered by the mainline sector are unsustainable.
Noting that EasyJet has operating margins of 12% on average sector fares of £47 ($73) he says he "cannot be convinced" that mainline carriers do not need fares of twice this level to operate at a reasonable profit level. "In the long run, your cost base sets your average fares."
EasyJet has been successful in attracting a significant amount of business traffic. Although the airline does not differentiate between leisure and business customers, Webster estimates that around 50% of passengers are travelling midweek, and are "either business travellers or very wealthy". He notes that he has sat next to passengers from IBM and Citibank on easyJet flights, and is proud of the fact that flights to the Geneva Motor Show were filled with people from Ford and General Motors. "Companies that manage their finances well are including us as a travel option," he says.
With the Airbus deal sealed and the Go integration well on the way to completion, Webster has more time to devote to other issues. "I wouldn't say life is getting easier, but is certainly getting more manageable," he says. Looking to the future, easyJet's focus will be on the cost base, or more particularly the cost base of their business partners. He says he is not going to adopt Ryanair's policy of putting pressure on airports to lower prices, but is keen to see them adopt low-cost business practices. "We have unfinished business in Geneva," he says, noting the airport was designed with a Swissair hub operation in mind, "and I don't even want to talk about Zurich". The long-running saga with Luton Airport over fees has been resolved.
As the Airbus deal shows, Webster is prepared to use easyJets' newly acquired market clout to its advantage. The low-cost sector and short-haul European flying in general are becoming ever more competitive. Webster clearly believes that easyJet is in a good position to survive any bloodletting. Providing Webster has got his sums right, it will be a force to be reckoned with.
REPORT BY COLIN BAKER IN LUTON PHOTOGRAPHY BY ETIENNE DE MALGLAIVE
Source: Airline Business
