EasyJet’s Long term Hangs on Founder’s Bid to Disregard Management

(Bloomberg) —

EasyJet Plc’s future will be decided in a single vote on Friday, with billions of dollars of aircraft orders at stake.

Top shareholder Stelios Haji-Ioannou has called for the ouster of the U.K. airline’s leadership in the middle of the coronavirus crisis. EasyJet’s founder and former chairman has spent more than 15 years opposing the plans of successive managers on the grounds that they’ve been too investment-intensive and offered insufficient returns.

Haji-Ioannou’s latest campaign comes to a head at an extraordinary general meeting when investors vote on his motion to remove four directors, including Chief Executive Officer Johan Lundgren, Chairman John Barton and Chief Financial Officer Andrew Findlay.

The clash centers on an order for more than 100 Airbus SE A320neo jets that make up the bulk of 4.6 billion pounds ($5.6 billion) in capital spending planned through fiscal 2023. Haji-Ioannou says the purchase will drain cash as the air-transport industry faces years of subdued demand in the aftermath of the coronavirus crisis. EasyJet says it’s revised the order and that the debate creates an unnecessary distraction at a tough time.

“It’s a really important moment for the airline,” said Luke Hickmore, a fund manager with Aberdeen Standard Investments who manages around $3 billion for his firm. “He wins and the board becomes his to control and leads to a slashing of aircraft orders. At the moment that’s no bad thing, but how do you grow back any time soon?”

EasyJet traded 1.4% lower as of 8:08 a.m. in London, taking the stock’s decline this year to 60%. The EGM is scheduled to start at 10 a.m. in the U.K. capital.

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CEO Lundgren has deferred the delivery of 24 planes to an undetermined date. He says EasyJet must be ready to renew its fleet when traffic finally rebounds and that the terms of the Airbus deal are uniquely flexible.

The airline says it’s reduced its near-term capital expenditures by more than 1 billion pounds, though it has yet to announce job cuts of a level announced by peers. British Airways planning to cut 12,000 posts and Ryanair Holdings Plc and Virgin Atlantic Airlines Ltd. 3,000 apiece.

Haji-Ioannou, 53, wants EasyJet’s existing fleet cut to 250 aircraft from 318. He has generally failed to attract broad shareholder support in previous battles with management, which have included clashes over pay and the Easy name.

Attritional Attacks

Yet the attritional nature of his attacks has borne fruit. Barton’s predecessor as chairman, Mike Rake, announced his departure in 2013 less than six months after surviving a dismissal vote. EasyJet also pays out a higher-than-average 95% of its free cash flow, according to Citigroup analyst Mark Manduca.

What’s different this time around is that rather than riding the crest of a decades-long surge in air travel, Haji-Ioannou’s call for a clampdown on spending comes with the industry mired in the deepest crisis in its history — something that could turn more shareholders to his way of thinking. A decline of two-thirds in EasyJet’s share price will also focus minds, Manduca said.

A defeat for Lundgren, a Swede who took over in December 2017 and is the same age as Haji-Ioannou, would still come as a surprise.

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The founder and his family collectively own about 34% of EasyJet, whereas the Luton, England-based company reckons it could have the backing of shareholders controlling 45% of votes, the Sunday Telegraph reported, citing an interview with Lundgren.

A spokesman for Haji-Ioannou said they believe the vote will be very close and that many small shareholders have pledged support for their position. The vote is not a distraction but “a reaffirmation of shareholder democracy” that puts the interest of those risking their capital above “here today gone tomorrow” management, the spokesman said.

Invesco, Ninety One U.K. and Phoenix Asset Management, the three biggest investors after the founder with a holding totaling of about 15%, have publicly pledged their support to management.

Shareholder advisory firms Institutional Shareholder Services, Glass Lewis and Pensions & Investment Research Consultants have also recommended that people vote against Haji-Ioannou’s resolutions.

‘Scoundrels’ Jibe

In the last few weeks, the Greek-Cypriot entrepreneur has stepped up his campaign by questioning the nature of EasyJet’s relationship with Airbus in light of the manufacturer’s settlement earlier this year of a corruption case concerning aircraft sales. Haji-Ioannou has referred to the board and management as “scoundrels.”

He’s also condemned other investors for failing to call EasyJet to account, said Britain’s Financial Conduct Authority should face a judicial review over a lack of action, and offered a 5 million-pound reward for evidence of wrongdoing that leads to the cancellation of the Airbus order.

At the shareholder meeting, Haji-Ioannou plans to present questions including whether Airbus controls any EasyJet shares and if the carrier meets standards of a “going concern,” according to a statement from his EasyGroup business.

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Should he win the vote, EasyJet will be plunged into turmoil at the toughest moment in its 25-year history as European airlines haemorrhage an estimated $89 billion in revenue this year due to the pandemic, with the entrepreneur planning to call on Chief Operating Officer Peter Bellew to scrap the plane deal before the appointment of a new chief.

EasyJet, which this week revealed that email addresses and travel data of 9 million customers were taken in a cyber attack, has said it plans to resume flights from 22 European airports on June 15, becoming one of the first airlines in the region to begin building up services as the coronavirus lockdown eases.

Even if the motions fail, it’s hard to see Haji-Ioannou giving management much respite given heightened concerns about costs and cash flow in the post-virus era.

“It will be helpful if it’s nice and clear cut,” said Andrew Lobbenberg, an analyst at HSBC. “He’s clearly on a mission here.”

(Updates with shares in sixth paragraph, jobs situation, questions to be asked at EGM and cyber attack from eighth)

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