From the FT today;
EasyJet caught in a City headwind
By Mark Odell
Published: June 8 2004 5:00 | Last Updated: June 8 2004 5:00
The share tumble that greeted EasyJet's results last month left Ray Webster, the airline's chief executive, shell-shocked. The furious reaction from investors and analysts following a second warning on profits yesterday may well leave him wondering how secure his job is.
The anger and dismay was palpable around the City yesterday after the airline disclosed it had misread the impact of the ongoing price war in the sector and the rising cost of fuel.
To make matters worse, investors and shareholders trying to get further clarification from the company about the trading update were told Mr Webster was in Singapore at an annual airline trade association event. Meanwhile, Chris Walton, the finance director, was in meetings.
The reaction was immediate, sending the shares down by about 20 per cent from 200¾p to 163½p, leaving long-term holders of EasyJet shares with a stake whose value has halved in a month.
This reaction represented more than just a correction as analysts slashed their profits forecasts for this year and next in half. It was also a signal to management that they may have pushed the patience of the City too far.
"This announcement will cause further significant damage to EasyJet's management credibility," said one large shareholder, who listed among the other concerns an overpayment for Go, the low-cost airline bought from British Airways, and mismanagement of capacity.
"I see no positive news on the horizon so it is likely that for the next nine to 12 months the shares will trade below their net asset value, which I estimate is 200p, reflecting the significant damage to their credibility," he added.
Another analyst, who has been highly supportive of EasyJet in the past, was equally angry as he had to face clients demanding to know why he had not seen it coming after the airline had warned of pressure on yields.
"Management actually laughed at us when we suggested second-half yields might be down by 5 per cent just four weeks ago. Now they are telling us it is 10 per cent and are not discounting a 15 per cent fall in the fourth quarter. I am very upset," he said.
He added Stelios Haji-Ioannou, the founder and single largest shareholder of EasyJet, should consider changes.
How the company steered analysts in the past few weeks - and questions over whether analysts should have reacted more robustly than downgrading their forecasts by just 15 per cent after the interims - is a valid concern among investors.
The belated reaction follows repeated warnings this year from Ryanair, the market leader in the low-cost sector with EasyJet.
Michael O'Leary, the Irish carrier's chief executive not known for mincing his words, repeated his warning at the time of its results last week.
He said the market should prepare for a bloodbath as the two dominant players take on the mounting competition from droves of upstarts across Europe.
"In contrast to the usual outspoken Mr O'Leary who has been warning us all for some time of the consequences of increased competition, all we got from EasyJet at the interims was of a modest decline in yield. Now all of a sudden it's much more than modest," the shareholder said.
In a sign of how far relations have deteriorated, one of the the most positive comments yesterday came from Chris Avery, airline analyst at JP Morgan.
In a research note, which saw him cut the forecast for this year from a pre-tax profit of £98.3m to £52.1m, he wrote: "The stock has fallen a long way [as have earnings estimates], but we believe that the company is building long-term shareholder value at the expense of shorter-term profitability.
"We see few fresh catalysts, hence it might be better this summer to benefit from EasyJet's business model as a passenger." Investors may want more than a cheap flight to address their concerns.
Time to call Barbara!