Should easyJet cancel its 107-strong £4.5bn Airbus order? Sir Stelios certainly thinks so.

On Monday easyJet grounded its entire fleet for two months amid a collapse in demand for air travel.

What you may not have seen is the letter published by Sir Stelios Haji-Ioannou to the non-executive directors of the airline, threatening to fire them one by one until the current Airbus contract is cancelled.

You can read the letter here. It is volatile, to say the least. (EDIT: link deleted as document removed)

Sir Stelios is the founder and largest shareholder of the airline.  His family owns a 34% stake and received a dividend of over £60 million last week for its troubles.

The letter states in no uncertain terms his desire to terminate the arrival of new aircraft and cancel the existing Airbus order to avoid a government bailout:

“The “elephant in the room” and main risk to survival of the company is the expected £4.5bn of payments to Airbus between 2020 and 2023 (as stated in the results presentation dated 19 November 2019) for the future delivery of 107 aircraft which the company CANNOT afford. That liability of paying Airbus £4.5bn dwarfs today’s easyJet market capitalisation of £2.4bn.

[…] With the fleet now grounded the only other major costs still running are crew costs of £859m per year (per last year’s accounts) which should be reduced by around half thanks to the UK government’s furlough schemes.”

Stelios believes that easyJet should cancel the entire order and raise new funding through an equity issue in which Sir Stelios has agreed to take part.  He does not want the airline to take a Government bailout, possibly because it would involve him having to forcibly dilute his shareholding.

He suggests that easyJet can withdraw from the order on grounds of force majeure or on grounds of bribery.  Whilst Stelios chooses his words carefully, he suggests that the recent multi-billion Euro fine paid by Airbus to settle claims of bribing airline officials to order Airbus planes could create an opening.

Whilst £4.5bn is easyJet’s entire capex budget and not necessarily exclusively for aircraft, it works out at around £42 million per plane.  Stelios believes that this is high, although it is not clear what else is included in the £4.5bn.

The expansion of the easyJet fleet has long been a bone of contention for Stelios and his fellow family shareholders.  This is not the first time he has clashed with the easyJet board.  In 2011, Sir Stelios failed to remove the then-chairman and even claimed he would found a rival airline called Fastjet.

Sir Stelios isn’t necessarily barking up the wrong tree this time.  With the entire easyJet fleet grounded for at least two months and a likely slow rebound in bookings, the 107 A320neo aircraft that easyJet has on order are a liability.  I doubt easyJet is the only airline to seek a renegotiation of its order in the near term.

Whilst Sir Stelios is in favour of a scorched-earth policy, the board seem to be taking a different tack.  In response to his letter, the company said it is “working with suppliers to defer and reduce payments where possible, including on aircraft expenditure.” This is a sensible route to take, as cancellation fees may be high so late in the game.

Stelios claims that easyJet has been receiving incrementally lower returns from recent aircraft purchases.  (He actually claims that the most recent 100 aircraft received by the airline are loss-making.)  This would not be surprising.  Logically, the airline will have already picked off the lowest hanging fruit, although if there were a number of major short-haul airline failures in Europe the economics could change quickly.  With another 100+ aircraft to keep busy, it is debatable at present whether there will be enough profitable routes for them to fly in the medium term.

Deferring the order is probably a better strategic decision.  Airbus has a multi-year waiting list for short-haul aircraft at the moment, which is the only reason why Boeing has not been receiving substantial 737MAX cancellations.  Airbus should be able to fill the spots on its production line relatively quickly with easyJet potentially pushing out its deliveries by 3-4 years.

If Airbus won’t agree, Stelios wants to cancel anyway – any lawsuit from Airbus and subsequent appeal would take a similar amount of time and achieve the same end result.