Even by its opportunistic playbook, New York-based private equity giant Apollo’s swoop on EasyJet in recent days, after a deal was as good as done with smaller peer Castlelake, was a ruthless move when others have already done much of the groundwork.
Apollo bided its time as Castlelake made five proposals over the past month to finally land at a bid of £6.90 a share that EasyJet chairman Stephen Hester – former head of Royal Bank of Scotland (now NatWest) – and the rest of the board concluded last Sunday that it was “minded to recommend”.
EasyJet revealed on Friday that Apollo had come forward two days earlier with a £7.15-a-share offer – valuing the group at £5.7 billion – that has now won over the board.
It’s the kind of ambush Michael O’Leary would surely appreciate, having employed a similar brand of corporate brinkmanship when he quietly built up a stake in Aer Lingus and made a takeover bid – albeit one that failed – only days after the flag carrier was floated 20 years ago.
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Shares in Ryanair and other big European airline groups advanced on news of the bid, with investors mindful that the higher proposal – which is 28 per cent above Castlelake’s original pitch and 81 per cent higher than EasyJet’s “undisturbed” price of late May – is likely to lead to more painful restructuring by the owners to make the figures work.
O’Leary said in an interview with The Irish Times last week, that the fallout from crises such as Ukraine and Iran wars, and the Covid pandemic, will hasten an “inevitable” consolidation of European air travel into four main carriers, with Ryanair as the biggest and sole low-cost player.
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Its rivals will be: International Airlines Group (IAG), owner of Aer Lingus, British Airways and Iberia; Air France-KLM; and Germany’s Lufthansa. Others will fail or be taken over.
He said an EasyJet deal could lead to someone else making an approach for Hungary-based Wizz Air “maybe later this year”, adding that AirBaltic and Norwegian are also vulnerable to approaches.
Brent crude oil remains up more than 25 per cent so far this year at about $75.50 a barrel – even if well off its April high of $126. Ryanair was the most prepared big European carrier for the impact of the latest Gulf conflict on energy prices, starting off with about 80 per cent of its fuel needs for the year to the end of next March hedged at the equivalent of about $67 per barrel.
O’Leary has suggested several times in recent weeks that Ryanair would begin hedging for the next financial year once market prices fell below $80, although jet fuel – the product the airline actually hedges – soared faster than crude oil during the conflict and has since given up less of its gains.
Alex Irving, an analyst with Bernstein in London, estimates that consolidation still has room to run in Europe, either through acquisition or airline failure, noting that more than half of airline bankruptcies occur in the last four months of the year, after the summer travel peak. The six biggest airline groups only account for 70 per cent of capacity across the Continent, he said in a recent report.
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“There is still a significant share of capacity controlled by smaller, weaker airlines. These are more common in central and eastern European markets. It is here that we see the greatest likelihood of financial distress and bankruptcies, and would expect Ryanair to move quickly [to add capacity] in response to any market exits,” according to Irving.
O’Leary has a winning track record of buying into downturns when others pull back – signing large plane orders with Boeing at deep discounts following the 9/11 attacks and at the height of Covid, and growing market share aggressively during the financial crisis.
But he must know that Ryanair needs a sharper earnings trajectory to reach the €4 billion annual net profit target that would unlock a final €153 million payout – by way of the triggering of stock options – under his recently extended contract, which runs until the end of March 2032.
Irving’s earnings forecasts for Ryanair run through March 2032 – among the longest-range estimates from any analyst covering the stock. He expects the airline’s net profit to edge above €3 billion by then. Extending his projected compound annual growth rate by another year implies profits would reach roughly €3.2 billion when O’Leary’s contract expires.
Even extrapolating the growth rates forecast by other big brokerages, including Deutsche Bank, Barclays, Goodbody and Bank of America, the outcome lands in a similar range. The key swing factor is the price of jet fuel, of course, which typically equates to a little over a third of revenues. But the conclusion is clear: Ryanair would need to close an €800 million earnings gap to unlock the full target.
Failure to bridge that would leave O’Leary relying on the alternative trigger event: Ryanair’s share price soaring to exceed €42 for 28 consecutive days over the remaining years of the contract. The stock is trading at under €27.
Getting to that valuation may largely depend on O’Leary, who has led Ryanair since 1994, helping to shape a convincing plan around his own succession.
