The easyJet (LSE: EZJ) share price has come under intense pressure during the coronavirus-induced stock market crash. Trading north of 1,500p immediately pre-meltdown, it’s below 600p as I’m writing.
And as if easyJet didn’t have enough on its plate, its founder and largest shareholder, Sir Stelios Haji-Ioannou, has launched an attack on the directors. This came in the form of a letter to the board published on his personal website. What are investors to make of the letter and the company’s current situation?
State aid
It was only in January that easyJet’s chief executive Johan Lundgren was moaning about the government’s Flybe rescue. He said: “We do not support state funding of carriers … taxpayers should not be used to bail out individual companies.”
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Just a couple of months later, and he’s found himself having to plead for government support, warning easyJet and other airlines could go bankrupt without it. Not comparable with the Flybe rescue, he’s argued, as easyJet is not seeking “bespoke” state aid.
Haji-Ioannou contends the “main risk to survival of the company is the expected £4.5bn of payments to Airbus between 2020 and 2023 … for the future delivery of 107 aircraft which the company CANNOT afford.”
He wants easyJet to serve a termination notice to Airbus, and adds: “I do not support the current calls by Johan Lundgren for government loans. If we don’t pay AIRBUS we don’t need government loans. It would be an abuse of taxpayers’ money to obtain loans to pay AIRBUS … We should raise equity … in order to replenish the current losses.”
Liquidity
The grounding of easyJet’s entire fleet, announced yesterday, has removed significant cost. And the company said it’s continuing “to take every action to remove cost and non-critical expenditure from the business at every level.”
It’s also reached agreement on furlough arrangements for its cabin crew. Effective 1 April 2020, for a period of two months, crew will receive 80% of their average pay through the government’s job retention scheme.
Despite this, and having recently reported net cash of £1.6bn and a $500m revolving credit line, the company said it’s in “ongoing discussions with liquidity providers.”
What does it mean for investors?
Clearly, there’s considerable uncertainty about the future. We don’t know how long the impact from Covid-19 will last. We don’t know if easyJet’s ongoing discussions with liquidity providers will be successful. And we don’t know how dilutive an equity fundraising would be.
My Motley Fool colleague Harvey Jones recently wrote about the idea of buying easyJet shares: “It’s a wild, desperate punt, and I don’t want to take that sort of risk right now.”
Ordinarily, I’d agree with that assessment. However, we’re in extraordinary times. Governments are doing everything possible to help businesses stay solvent. I think lenders are likely to be relatively tolerant, particularly with companies whose underlying businesses are strong, like easyJet. Similarly, such businesses with a supportive major shareholder like Haji-Ioannou, are also likely to be more successful in raising fresh equity.
I wouldn’t want to own too many stocks in easyJet’s position. But, on balance, I rate it a speculative ‘buy’. A small stake and a willingness to participate in a rights issue may be the right recipe.
