So much for the idea that easyJet could improve its profits every year.
Those investors who enjoyed the shares’ splendid run from 300p in 2011 to £18 in 2015 have discovered that volatility has not been abolished in the airline game. EasyJet says its profits will fall 28% in the financial year that closed last month. Its shares have almost halved in value in 12 months and now stand at 933p, down 7% on Thursday.
The vote for Brexit is merely the lesser of two upsets. A weak sterling has been unhelpful to the tune of £90m for a company that flies over so much eurozone airspace and pays so many landing charges in euros. The greater impact has come from disruption, strikes by air-traffic controllers and the effects of terrorist attacks in Nice, Paris and Brussels.
Revenue per seat is running at 8% below last year, sending a strong signal that, behind a year of “extraordinary events”, there is a European short-haul market that simply has too much capacity. Cheap oil has encouraged too much expansion. Don’t worry, the chief executive, Dame Carolyn McCall, says soothingly, “the current environment is tough for all airlines, but history shows that at times like this the strongest airlines become stronger”.
Ultimately, she’s right. EasyJet still expects to make pre-tax profits of about £490m in the year. That is a commanding position from which to sit back and wait for weak airlines to shrink, go bust or seek shelter. The trouble is, the wait can be long in an industry where optimism is ingrained. Air Berlin is slashing capacity after being thrown a lifeline by Lufthansa but easyJet (and Ryanair for that matter) would prefer to see more radicalism.
Meanwhile, easyJet itself has been adding capacity – 6% last year, 8% this year. A cheerful interpretation says the new routes will intensify rivals’ pain and bring long-term reward. Alternatively, easyJet has stepped up expansion at the wrong moment.
A comfort for shareholders is a chunky dividend set at 50% of post-tax earnings, giving a yield of 5.7% at the reduced share price. But prospects for earnings themselves are the real worry. One tough year could be viewed as exceptional, but the City is expecting at least three before the clouds clear. That is how life used to run for airlines, and probably does still.
Tough tactics backfire for HarbourVest’s bid for SVG Capital
It ought to be hard to lose a £1bn takeover bid when you start with 51% support and are offering hard cash. Yet HarbourVest, the Boston outfit stalking the quoted private equity fund SVG Capital, looks to be heading for defeat.
At the eleventh hour, SVG has produced a more convincing white knight than it had managed to previously. Goldman Sachs plus a Canadian pension fund – two credible outfits – have put an offer on the table worth about 680p a share, versus HarbourVest’s 650p.
Conceivably, SVG shareholders could still prefer the lower offer because it is more certain and the cash would arrive sooner. But that’s not the way to bet. Two big institutions, Aviva Investors and Legal & General Investment Management, have withdrawn their support for HarbourVest’s proposal and SVG’s share price, at 667p, says the Goldman consortium will win.
The difference between the two offers works out at about £35m – almost nothing in the context of £1bn contest – but HarbourVest cannot match Goldman’s price because it declared its bid “final” on day one. Aggression appears to have backfired. For the sake of a cherry on top of the cake, HarbourVest will probably lose. Well played, SVG chair Lynn Fordham, for scratching out a few extra quid for her shareholders, but HarbourVest’s tactics were baffling.
Andrew Tyrie: board record-keepers must do better
The fastidious Andrew Tyrie strikes again. The chairman of the Treasury select committee is one of very few MPs who could provoke a heated argument over the accuracy of board minutes. He is also right to do so.
Tyrie’s complaint is that the minutes of the failed Royal Bank of Scotland and HBOS were next to useless for investigators conducting postmortems. If the non-executive directors were doing their job of challenging management and assessing risks, it was impossible to tell from written records. Disagreements weren’t routinely recorded, so the minutes could not serve as a “black box” to help prevent future mistakes. Sort it out, Tyrie told the Institute of Chartered Secretaries and Administrators (Icsa) last year.
The body has failed to do so, says Tyrie now. Its response is “deeply flawed” and “inadequate” because it clings to the idea that directors must actively demand that their dissent be noted, he suggests. That, as Tyrie implies, seems unhelpful and defensive.
Simon Osborne, who might have expected a quiet life as chief executive of Icsa, is the man in the firing line. “I would be very grateful if Icsa could take another look,” writes Tryie, terribly politely. Translation: do so before I summon the chancellor and the governor of the Bank of England.
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