Easier said than done: Are Stelios’ plans for a low-cost carrier that will rival easyJet just pie in the sky?

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LIKE a highly skilled ambassador, Carolyn McCall has learned to field tricky questions on the subject of Sir Stelios Haji- Ioannou, the most contentious shareholder on the register at low-cost carrier easyJet.

In public, the well-polished platitudes roll off the tongue of the easyJet chief executive in response to queries about relations with Sir Stelios, the company’s high-profile founder who controls nearly 38 per cent of its shares. Though the Greek Cypriot left the easyJet board last year, he has used that stake to continue a three-year battle against expansion plans which he says are destroying shareholder value.

A degree of détente appeared to emerge just under two weeks ago after easyJet announced a dividend distribution that will benefit Sir Stelios and his family to the tune of some £71 million. The next day, the easyGroup conglomerate he runs withdrew its request for an extraordinary meeting to oust non-executive Rigas Doganis, effectively abandoning what had been the latest phase in its campaign against the company.

The truce, however, was short-lived as hostilities erupted again on Monday with the surprise announcement that Sir Stelios is to launch a carrier to rival easyJet. Though just a single web page so far, the prospect of “Fastjet.com…by Stelios” caught even the industry’s hardened veterans off-guard, as none could see any reason why the tycoon would undercut one of the main sources of his wealth.

“It is a very peculiar situation,” says Andrew Lobbenberg, aviation analyst at easyJet broker RBS. “I don’t really see the logic, and I don’t think he will launch another low-cost airline, because there is no business case for it.”

Though credited as having a major hand in revolutionising the European aviation industry, the market today is quite different from that which Sir Stelios faced when he launched easyJet in 1995. Both it and Ryanair – the low-cost market leader headed by Michael O’Leary – benefited at that time from a convergence of factors that are no longer prevalent.

“If he were to set up an airline in Europe this time around it would be much more difficult because Ryanair is much larger than when he set up EasyJet and EasyJet is much larger,” O’Leary told shareholders at a meeting in Dublin last week.

“All he has done so far is set up one page on the internet,” he added dismissively, “I wouldn’t hold my breath.”

Both O’Leary’s firm and easyJet were born in the midst of a prolonged economic boom which fuelled the overall growth in flying. Alongside this came the deregulation of European aviation, which allowed new carriers to enter the market. The UK deregulated first and furthest and thus enjoyed the biggest boom.

The rise of the internet also played its part, allowing newcomers to bypass older and more expensive distribution models. Meanwhile, new aircraft became more affordable after the US traffic downturn that followed the terrorist attacks of September 2001.

None of these factors currently has a bearing on the rapidly-maturing European market, where few believe there is room for more no-frills carriers.

“Going out and saying our tickets are cheaper than a pair of jeans, well, everybody has heard that before,” says John Strickland, director of aviation specialist JLS Consulting. “Around those places where easyJet flies, launching a rival wouldn’t make any sense.”

At the moment, easyJet flies on more than 560 routes between 129 airports in 29 countries across Europe. It has turnover of nearly £3 billion and more than 180 aircraft.

The latter has been at the root of Sir Stelios’ discontent as he has pursued directors who backed former chief executive Andy Harrison’s aggressive expansion plans. He believes new aircraft orders have seriously over-estimated the growth potential in the European budget market, and has pushed instead for the return of cash to shareholders.

Sir Stelios has refused to comment on this new venture beyond a statement issued on Monday, in which he accused easyJet of briefing journalists against him and thereby breaking the terms of a so-called comfort agreement signed last October when the two sides struck a brand licensing deal for the “easy” name. According to him, these off-the-record briefings have invalidated clauses that restrict the shipping scion from putting his name or backing into a rival European airline.

For its part, easyJet has denied these claims and suggested that court action is a possibility. “To the extent that any activity of Fastjet, Sir Stelios or any company controlled by him infringes or would infringe those rights, easyJet will take necessary action to protect the rights of easyJet and the interests of its shareholders,” the company said last week.

It is not known whether Sir Stelios currently has financing or aircraft to back up the new venture, leading some to question whether Fastjet is just an elaborate negotiating ploy. His sceptical take on the industry’s growth prospects also belies the rationale for starting up a new company.

“The point is, we don’t know what he is going to do,” says Strickland. “All we have seen so far is this small announcement and holding page on the web.”

Like many others, he finds it difficult to believe that Sir Stelios would deliberately cannibalise business from a company in which he and his family own a major stake. However, reading between the lines of the terse statements issued by easyGroup, plus the wording of the October comfort agreement, Strickland does have a couple of potential alternatives.

“Might he set up an airline somewhere else in the world that does not affect easyJet’s operations? That is a possibility.”

He also notes that the restrictions on Sir Stelios do not apply to aircraft of 25 seats or less. Fastjet could therefore be a new VIP business service along the lines of NetJets. “That would be something fresh, new and challenging,” Strickland says.

Relations between easyJet and its founder erupted into open conflict in 2008 when Sir Stelios fell out with the company over use of the “easy” brand and the airline’s aggressive expansion plans. The brand dispute was settled last year in a deal which could earn Stelios up to £65m over the next decade, but appears to have failed to dampen his anger with former boardroom colleagues.

Harrison was particularly targeted before his departure last year to join leisure group Whitbread, and continued to draw the easyJet founder’s ire after it emerged that the carrier’s ex-boss was paid £1m for six months’ work. Sir Stelios claimed that the two-year brand dispute allowed Harrison to gain an upper hand in pay negotiations.

This was followed in July by a call from Sir Stelios for a vote on the removal of non-executive Sir David Michels, whom he criticised for his role in putting together Harrison’s remuneration while serving as interim chairman. Michels stepped down rather than go through with the vote.

Though Sir Stelios has now backed down in his call for the removal of Doganis, an aviation academic and former chief executive of Olympic Airways, easyJet is still some way off from regaining the stability it needs. While Sir Stelios admits privately that McCall and chairman Sir Michael Rake are doing a good job, analysts say his actions are continuing to prove a distraction.

“There really is too much of a stage show and theatrics going on here, and it’s been going on for far too long,” said one. “Obviously he can get along with McCall and Rake – after all, they negotiated the branding deal – but all the uncertainty this creates is damaging and destabilising.”

Despite these on-going difficulties, easyJet has comfortably outperformed all other European airline stocks this year bar those of Ryanair. However, Lobbenberg believes there is room for more uplift should peace ever break out between the man who set up easyJet and those who run the business today.

“It distracts the board and it distracts the senior management, but I think the performance of the business shows they have done a good job of insulating from these external factors,” says the RBS analyst. “But it most certainly is a drag on the share price.”