EasyJet goes for Airbus

EasyJet has finally announced a winner in its long-awaited fleet competition, turning its back on the Boeing 737 workhorse in favour of a massive order for 120 Airbus A319s plus 120 options.

The decision, which follows months of intense speculation, is clearly the deal of the year for aircraft manufacturers and marks an ambitious expansion phase for what is now Europe's largest low-cost carrier. With the aircraft to be delivered over five years from September 2003, easyJet will be taking on average two aircraft per month.

EasyJet's current fleet is based entirely around versions of the Boeing 737, with a current fleet of 64 aircraft including the Go acquisition and its own Swiss-based operation. It plans to retain the newer 737-700s, of which 14 are still on order, together with a dozen of the older 737-300s. Overall that would leave easyJet with a mixed fleet of 164 by the end of 2007.

The order includes an extensive maintenance and support package designed to ensure that the introduction of the A319 will be no more expensive than taking additional 737s. EasyJet also estimates that the A319 represents a 10% saving on the 737 in terms of seat operating costs. Stelios Haji-Ioannou, easyJet's outgoing chairman, says that the price per aircraft seat represents a 30% discount to the 15 737-700s the carrier ordered four years ago. The current list price for both the 737 and A319 stands at around the $50 million mark.

Ray Webster, easyJet chief executive, says that speculation about a 60%discount from list price is "a bit ambitious, but not far off". He adds: "I've been buying aircraft for 20 years and I've never seen a deal like this." Boeing has already hinted that the price went too low for it to stay in the running.

Stelios is quick to address criticism over the move to a split fleet. "As easyJet's largest single shareholder, I was faced with the dilemma of either following the conventional wisdom in the marketplace in order to keep shareholders happy in the short-term, or doing what's right for shareholders in the long run," he says. "Sticking to old-fashioned ideas such as 'low-cost airlines only fly Boeing' does not reduce costs." Webster adds: "Once we saw the Airbus offer it was a no-brainer." The carrier can also look to the success of US low-cost star JetBlue, which bucked the Boeing trend three years ago.

The aggressive rate of expansion represents a challenge to easyJet, which is in the process of integrating Go's operations following the purchase of the UK low-cost rival, and also has an option to buy Munich-based DBA from British Airways. EasyJet experienced serious difficulties with delays over the summer as it tried to introduce a new rostering programme amidst its rapid expansion.

There has been a host of new entrants to the low-cost sector over the last year. "The question for easyJet will be: can they fill these aircraft against a background of greater competition?" says Chris Tarry, analyst at Commerzbank.

Edward Stanford, analyst at investment house Casenove, believes that the Airbus deal adds 25% of value to the October share price. "More generous pre-payment terms reduce the likelihood of an eventual rights issue to cover fleet growth," he adds.

Against a background of highly favourable lease rates, easyJet is increasingly moving away from the 50/50 lease/ownership split it had in place when it floated in 2000. As with the manufacturers, there is likely to be intense competition among leasing companies for a share of the business.

COLIN BAKER LONDON

Source: Airline Business