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Angry Sir Stelios leaves easyJet Board to lead shareholder activism

Sir Stelios Haji-Ioannou is resigning from his position as non-executive director of easyJet PLC with immediate effect in order to focus on a campaign as a shareholder activist against the increase of the size of the aircraft fleet of the company beyond the current level of about 190 aircraft.

Sir Stelios is considering if, and when, it will be necessary to requisition a General Meeting at which he will ask shareholders to reject the easyJet management’s strategy of “relentless growth in aircraft numbers at the expense of any profit margin increase”.

Since mid-2008 when the oil price spiked, Sir Stelios has regularly raised the issue but to no effect and now believes that a shareholder vote may soon be in the best interests of all shareholders.

A second easyJet director, Robert Rothenberg, has also resigned from the Board

Explaining his stance Sir Stelios commented, “For some time I have firmly believed that the easyJet management was pursuing the wrong strategy for the expansion of the business. A mere look at the share price graph over the last 10 years, practically a ‘flatline’, and zero dividends are proof of that. How can you buy 200 aircraft with shareholders’ money and create no wealth for shareholders?

“The management has been determined to continue to buy new aircraft from Airbus despite the fact that this huge expenditure is demonstrably failing to produce higher profits and therefore has created zero value for shareholders. As at 31 March 2010, the company was committed to buy another 59 aircraft from Airbus.

“I have been arguing for some time that a much higher priority should be given to restoring profit margins from the current 1%-3% to the more than 10% level of 10 years ago and delivering value to all shareholders. But the Board has refused to take into account my recommendations, using the pretext that the rest of the shareholders want something different, and instead remains resolved to go on squandering shareholders’ funds on more expensive aircraft that will probably destroy shareholder value.

“easyJet currently has a fleet of about 189 aircraft with outstanding orders for another 59 aircraft which at their open market value will cost at least another $2 billion. These new aircraft are the expensive legacy of an order signed by outgoing CEO Andy Harrison and Airbus in November 2006 when entirely different economic circumstances prevailed.

“At the time of the 2006 order with Airbus, easyJet’s house broker ABN Amro (now part of RBS) was forecasting a profit for 2009 of £284 million with profit growth expected to continue into 2010. Even the oil price back then was about half the recent levels. The reality is that easyJet’s profits last year, i.e. for the year ended 30 September 2009, the same year as the ABN AMRO forecast, were just £42.7 million. In my vocabulary Andy missed his profit targets by 80% since he bought those aircraft from Airbus in 2006! This year profits after tax are expected by some analysts to be as low as £100 million – depending on disruption to travel from the Icelandic volcano. That is well below the profits in 2006 when the order was placed despite the fleet having grown by 80% in the same period. Normally 80% more assets should lead to at least 80% more profits, not the other way round!

“Furthermore, I believe that the Board is failing to assess the purchase of these new aircraft properly. The management should measure the actual capital cost of each additional new aircraft (a number kept as a ‘secret’ from shareholders under the terms of the deal with Airbus) against the profitability of the next new route that the company will start operating on as a result of having one more aircraft. I believe that this analysis, had it been properly looked at by the Board, would have quickly revealed that each additional aircraft progressively dilutes margins and destroys wealth.

“The inescapable fact is that this airline used to make a bigger absolute profit using far fewer aircraft. The low-cost airline model is maturing, and management needs to now adopt different priorities to take the business forward. To date, easyJet management, supported by certain other Board members, have refused to do this.

“Having been a member of the Board and an insider, I was constantly out voted for the last two years on this important decision on the Airbus contract by the rest of the Board and the ‘typical gagging order’ was placed on me as an insider. Since the last so called ‘compromise’ at the annual Board strategy meeting in June 2009, the oil price – which forms one third of the cost base of an airline – has doubled and the new risk of volcanic disruption has materially impacted our projected profits again. The June 2009 compromise plan, which in any event was based on growth in numbers of seats flows, i.e. the wrong KPI, rather than number of aircraft, is already too optimistic, especially with an incumbent CEO on a golden parachute and insulated from the outcome of the 2010 profits of the company.

“I have therefore decided that the time has now come to take my case to my fellow shareholders. I am therefore resigning from the Board with immediate effect.

“Over the coming weeks, I will be considering if and when to requisition a General Meeting, at which I shall ask shareholders to reject the management’s strategy of relentless growth in aircraft numbers and focus on profit margin increase.

“In a possible shareholder vote I may also ask shareholders to join with me in demanding that the Board seek to renegotiate the contract with Airbus to minimise the number of aircraft which need to be acquired over the next few years, and use whatever other means possible such as selling existing aircraft in the open market in order to keep the number of aircraft in the fleet at about the current levels of about 190 aircraft for the next 3-4 years. I am convinced this strategy will produce higher profits in absolute terms than keep increasing the fleet size for the sake of it. The Board should place a far higher priority on improving profit margins and returns to all shareholders.

“Furthermore, the Board has failed to create a contestable supply arrangement in the procurement of aircraft by entering into monopoly arrangements with Airbus. The shareholder vote should direct the Board to open these procurement arrangements to open and transparent competition.”

The airline’s current CEO Andy Harrison steps down from his post shortly to be replaced by Guardian Media Group CEO Carolynn McCall.

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