Easy jettison: The budget carrier is riding the recession well, but boardroom turbulence has yet to subside

Published on Saturday 12 December 2009 13:31

OPERATIONS may be gliding along smoothly, but turbulence continues to rumble through the boardroom at EasyJet, the largest carrier of airline passengers based in the UK.

Last week's surprise news that chief executive Andy Harrison will leave in June of next year was greeted with chagrin by investors, who had hoped that ongoing boardroom strife had at long last been resolved. Instead, they are now faced with the prospect of losing five of the company's eight most senior executives in a span of just 18 months.

Harrison, the former RAC chief executive who joined EasyJet in December 2005, is highly regarded in the City. News of his departure prompted analysts at Cazenove to cut their rating on the firm to "in-line" from "out-perform", with the broker's note adding that the loss of Harrison "is a blow to the company. We have a high regard for his achievements during his time at EasyJet and he will be a loss to the company," Cazenove added.

During his tenure, Harrison led EasyJet through dramatic expansion, with its fleet nearly doubling to more than 180 as the number of its routes grew from 200 to more than 400. Though the low-cost carrier has had to struggle along with its peers through one of the worst downturns in civil aviation history, it has fared better than most, as evidenced by the 12 per cent rise in passenger traffic to 3.35 million posted last month.

However, it was this expansion strategy that led to the very public bust-up with Sir Stelios Haji-Ioannou, EasyJet's founder and largest shareholder with 38 per cent of the stock under his control. As the worst of the recession hit following the collapse of Lehman Brothers, Sir Stelios aggressively opposed EasyJet's robust growth plans, arguing that the firm should conserve cash during a period of recession.

The conflict erupted in November 2008, when the Cypriot tycoon refused to sign off EasyJet's full-year accounts, and issued an 850-word statement explaining his reasons for not doing so. Amid the ensuing tensions, chairman Sir Colin Chandler left the board in April, followed by finance chief Jeff Carr in May and communications director Toby Nicol in September. The airline's commercial director and procurement director also departed during that period.

Harrison reportedly wanted to quit in May, but was persuaded to stay by a "retention agreement" that guaranteed he would remain in post until at least March 2010. Though he currently has no other job to go to, the recently divorced 52-year-old made no mention of any boardroom tensions when announcing his departure last week.

"I am looking forward to being part of the process of selecting my successor and am committed to ensuring a smooth transition," Harrison said in a statement. "I have loved being a part of EasyJet's success but am now looking forward to moving on to a new challenge."

Andrew Lobbenberg, transport analyst with ABN Amro, says Harrison's departure is disappointing, particularly as EasyJet has yet to find a permanent replacement for Carr. However, once these appointments are made, Lobbenberg expects stability to return.

"I would be surprised to see any further departures, because anybody else who wanted to leave probably would have done so by now," he said.

Though the global aviation industry is undergoing a severe downturn, EasyJet seems a more promising prospect than most. The company, which began operating in April 1992 with two routes from London Luton to Glasgow and Edinburgh, is one of possibly only three carriers in the world currently in the black. It made a profit of 43.7m for the year to the end of September, while increasing turnover by more than 12 per cent.

However, finding a successor for Harrison and a permanent replacement for Carr may yet prove tricky. More significant will be the image of chaos among the senior management team, and the perception of non-executive director Sir Stelios as a demanding and at times difficult major shareholder.

Gert Zonneveld, airline analyst at Panmure, says the new chief executive must have a strong vision and the ability to stand up to Sir Stelios when necessary. However, he stops short of suggesting that EasyJet's founder should have less influence on the business.

"It is very difficult for us sitting where we are sitting to comment on these things in detail, because we don't know exactly what has happened behind the scenes," Zonneveld says.

On one hand, expansion in the airline industry must be planned well in advance, as it can take years for the delivery of new planes or to secure new routes and landing slots. Luton-based EasyJet, which currently expects to increase its fleet to 207 by 2012, placed the order for these new Airbus aircraft seven years ago.

On the other hand, Sir Stelios' caution over breakneck expansion during a period of falling demand seems sensible. Though his desire for EasyJet to shell out dividends in the near future would clearly benefit his own bank account, this also appears a reasonable ambition, as the company has now been publicly listed for more than nine years.

Bookies Paddy Power have listed internal candidates from EasyJet as their top four favourites to take over the chief executive's job, but industry experts say the budget carrier is just as likely to look further afield. With a limited number of potential contenders from the airline industry, the EasyJet board may well even look to other sectors.

"I think they will look outside the industry," says Zonneveld. "Andy Harrison has done a pretty good job there, and he came from outside the industry."

He and others point out that EasyJet has a solid business model and a good performance record, making the company a decent investment proposition. However, until the management issues are resolved, questions will remain.

"Operationally they are doing very well, but nobody likes uncertainty," Zonneveld says.