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easyJet grounds fleet and responds to Airbus order demands from Stelios

It was a turbulent day for the airline industry, as Virgin Atlantic also asked the government for an emergency loan

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EasyJet celebrates delivery of its first Airbus A321neo in 2018 with then-transport secretary Chris Grayling

In a day of airline turbulence on Monday, easyJet PLC (LON:EZJ) said it has fully grounded its fleet of aeroplanes because of the coronavirus pandemic, while also trying to placate major shareholder Stelios Haji-Ioannou who wants the airline to cancel a massive order for planes.

With “no certainty” of the date for restarting commercial flights, the group has also reached an agreement for its cabin crew to take furlough arrangements from 1 April until the end of May, where they will be paid 80% of their average pay under the government’s coronavirus job retention scheme.

The FTSE 100 company applied for the taxpayer-funded scheme just days after paying out £174mln of its cash as dividends to shareholders.

Meanwhile, Haji-Ioannou, the budget airline’s founder and largest shareholder, sent a letter to the board with a list of demands, including that it addresses the "elephant in the room" and cancels a £4.5bn Airbus order.

The Airbus order, which he described as the “main risk to survival of the company” as the liability dwarfs the company’s current market cap of £2.4bn, should be scrapped using ‘force majeure’ and an independent law firm hired to investigate if any of the contracts “may have been secured by bribes”, in reference to a recent Serious Fraud Investigation. 

Haji-Ioannou, who received around £60mln in his dividend payment last Friday, said easyJet “needs to raise equity” via a rights issue and that he does not support chief executive Johan Lundgren’s calls for government loans. 

“If we don’t pay Airbus we don’t need government loans. It would be an abuse of taxpayers’ money to obtain loans to pay Airbus for an unprofitable investment in 107 aircraft. We should raise equity.”

Haji-Ioannou said if the board does not engage with him he will call a series of emergency shareholder meetings where he would propose ousting the group’s non-executive directors one by one every seven weeks.

In response, the company said it was seeking to “defer and reduce” payments to Airbus.

Shares in easyJet fell more than 5% to 554.8p by Monday afternoon, and are down around 60% so far this year, while Airbus shares flew over 7% lower in Paris.

Government bailouts...

Also on Monday, following speculation and rumours this month that governments around the world might have to think seriously about bailing out the industry, there were reports that Richard Branson's Virgin Atlantic has asked the UK government for emergency financial help, either via commercial loans or guarantees, or a 2008-style bailout where the government takes a stake.

Virgin Atlantic, which is 49% owned by Delta Air Lines Inc (NYSE:DAL), hope for a response from the government by early next week, Reuters has been told.

Elsewhere in the sector, International Consolidated Airlines Group (LON:IAG) said that that British Airways has extended its $1.38bn borrowing facility for an extra year and has not yet drawn down on any of its facilities.

IAG said, including the extended facility and some smaller additional facilities recently arranged, the group has €2.1bn of total undrawn general and committed aircraft financing facilities, up from €1.9bn at the end of last year.

The Anglo-Iberian group added that it "continues to have strong liquidity" with cash, equivalents and interest-bearing deposits of €7.2bn as of 27 March, with cash and undrawn facilities standing at €9.3bn.

Its shares were down 3% to 204.8p in afternoon trading, down 68% this year; while Ryanair was up 1% at €9.16, down 39% year to date. 

...and moral hazards

With Flybe having already gone bust and others floundering, "most airlines in the world will be bankrupt" by the end of May unless there is coordinated government and industry intervention, aviation consultancy CAPA said earlier this month. 

But reports the UK government could potentially bail out the likes of IAG, easyJet and Virgin is a “triple whammy” of moral hazard, said Barry Norris of Argonaut Capital: preferential treatment for owners of large companies at the expense of tax-paying smaller businesses; that government intervention could potentially inhibit future consolidation, and that none of the companies are “truly British”.

“Using British taxpayers’ money to prioritise the rescue of foreign shareholders would be questionable for any government; it is particularly difficult for one that prides itself on putting British interests first,” Norris said.

He said a recapitalisation – not just liquidity in the form of cheap loans – would really be required to make good the current cash burn and provide a big enough equity buffer to gain the confidence of other providers of capital such as bondholders and creditors who provide working capital.

“Due process would involve these airline groups making their first call for new equity from public capital markets. Although investors are likely to require a very attractive price to provide this cash injection, the airlines have not yet explored this choice and been rebuffed.

“If they cannot raise new equity at any price - and this is by no means certain - only then should the government consider protecting stakeholders with an intervention, which should wipe out existing shareholders and also impose losses on bondholders (whom otherwise would have been spared any negative consequences).”

Norris pointed to US investment guru Warren Buffett's remark that “investors have poured their money into airlines for 100 years with terrible results. It’s been a death trap for investors”.

Analysts at Hargreaves Lansdown said it was difficult for investors to calculate exactly how badly the airlines are doing.

Looking specificially at easyJet, as it is flying none of its planes and most of its staff have been furloughed, management will have a reasonable idea of what costs will be each week from here on out but investors don’t.

“We think the group has enough liquidity to manage a short suspension of European air travel, but if the disruption proves prolonged or the recovery is sluggish easyJet could be in real trouble.”

At AJ Bell, analysts noted that, like many other airlines, easyJet is trying to get passengers to rebook flights for another time rather than issue refunds so as to avoid having to shell out significant sums of cash.

“However consumer groups are putting pressure on the sector to give passengers back their cash, so easyJet’s problems are far from over,” they added.

  -- Adds share price, analyst comment --

Quick facts: easyJet plc

Price: 678.048 GBX

LSE:EZJ
Market: LSE
Market Cap: £2.69 billion
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