The airline business is not for the faint hearted. Since 2001 several major carriers have gone to the wall, or been gobbled up by stronger rivals. It’s a sector defined by pressures from rising fuel costs, turf wars with legacy carriers over landing spots, aggressive domestic and global regulation and travellers who demand low fares and more routes (not to mention shorter queues, free tea and coffee and a smooth ride over the Alps).
All of which makes one wonder why Chris Kennedy, easyJet group finance director since July 2010, agreed to join the airline as part of a fresh management team led by the then new chief executive Carolyn McCall.
Kennedy had, after all, survived the management cull at EMI instigated by Guy Hands’ Terra Firma buyout in 2007, and was happy in the role of chief investment officer.
He had already received one approach five months previously about the possibility of joining a low cost airline, but then a second call came. “The headhunter asked, ‘how about FD of easyJet’? So I thought, okay, I like easyJet. And I really like the people. In my experience, it takes you about an hour to see it’s a fabulous business, and the business model is good.
Despite the initial approach Kennedy says the selection process was rigorous. But of course it was a two-way process the CFO had to see if he had “a clear long term structural winner in Europe”. For him it also meant moving from a declining business [EMI] to one that was growing; and from a well-established company - 120 years old - to one that was a toddler, in comparison.
In doing his due diligence before signing on the dotted line he discovered that despite its position as Europe’s second biggest airline - by passenger numbers at least – easyJet was not in the best of health.
“It very quickly became apparent that staffing levels, cabin, crew and pilots had been cut too far. As a result, they were getting increasing delays and cancellations,” he says.
When the team joined on 1 July the first quarterly announcement was due at the end of July. Within about two weeks he says it was clear there was a problem. “I remember Carolyn and I sitting in a room going ‘we are going to have to announce that operationally the airline is in trouble’,” he recalls.
Reassessing the model
Kennedy’s work began immediately. While McCall spent endless hours examining and fixing the operational issues dogging the carrier, the finance chief undertook a strategic review.
That said, Ryanair now leads the way with around 11 percent of the European market. It has in contrast to easyJet followed a different model founded on creating a demand that didn’t previously exist. “Their fares are so cheap but they’re flying to airports that haven’t been flown to before and people travel because they can,” says Kennedy.
“I think our model is the one that everyone who wants to compete in the primary airports wants to follow. So that means the legacies will have to move to us and when it comes to the Ryanair model, I think there’s sufficient differentiation that we can both co-exist,” he adds.
While the public face of the airline was undergoing some cosmetic surgery without ditching its iconic orange associations, Kennedy was busy reengineering its cost base and financial strategy, which meant looking longer term.
“Up until we joined, the company had been focussed on making profits, which is fine. But airlines are a very highly capital intensive business. Aeroplanes are expensive, so just getting a return on them and getting that mentality that says ‘it’s not okay to make £100 million if you’ve got £4 billion invested in the company’. So, getting those metrics and getting that financial discipline was critical,” he explains.
It was this conundrum that Kennedy felt compelled to tackle. Being a CFO of a low fare airline cost management is one of the central metrics he’ll be judged on, he says. In the first 15 years of its existence, easyJet had led the industry in driving down the price they paid, beating each year’s big set piece cost target.
“But I don’t like big set piece cost targets. That’s because what happens is that the head of procurement always says, ‘I’m saving you £300 million a year’ but the costs are more than they were last year, so where’s the saving gone? It’s usually inflation somewhere else.”
As a result, Kennedy put in place the current lean cost management programme that focuses on the end results and asks ‘what is the unit cost?’ and ‘how much has it increased by?’ Under the new rules, that cost needs to be less than inflation every year. But that approach isn’t just a blunt instrument to strip out cost, he says.
“In fact, it’s looking as much at what we buy and how we do business, as the price that we pay,”
He says a lot of it comes down to good organisational skills. For example, he adds “We had seven flights taking off from Liverpool within five minutes of each other. That means you need seven different ground crews because they’ve all got to get out at the same time. But by spreading those flights out, every 15 minutes, you only need four crews, and not seven. So, bingo, you’ve got rid of the waste and your costs start to come down.”
The strategy review also raised the issue of the company’s liquidity position. Within a capital gearing limit of 50 percent, the company currently sits at around 30 percent.
“If there is a severe crisis or shock, and yields fall then we need the cash to be able to weather that storm,” Kennedy says. “So we’ve set a liquidity target of £4 million per aircraft, and we keep to that model.
He says it’s all about a strong balance sheet so that “you can outlive your competitors”.
So far, 18 months into the job, Kennedy can allow himself a moment of satisfaction. The most recent quarterly results show a profits boosted thanks in part to drenched Britons’ seeking some sun after one of the wettest summers on record.
Thanks to the boost, the company revised its full year profits forecast upwards putting it at between £310 million and £320 million. The CFO had previously estimated a result of between £280 million to £300 million for the year to the end of September.
The central question for Kennedy and his team remains however - where next for easyJet? Having gone from nought to £4 billion in 15 years by building a radically new brand through shaking up the ossified and inefficient legacy market, where does the low-cost upstart go from here? And does the re-orientation towards becoming a truly pan-European carrier expose easyJet to the worst of the euro zone debt crisis?
“Well, it’s still about growth, but we’re after profitable growth now,” he says. “The days of double digit growth are over, for us anyway. But growth is still possible and maximising returns which comes we think from steady growth.”
But to those who believe easyJet should follow the trend for consolidation within aviation and begin to grow by acquisition the CFO’s reluctance is clear.
“I’m not wary of deals per se, but I suppose what my corporate finance background does prepare me for is the queue of investment bankers and advisers coming to you with the next big idea. So it’s just having that healthy cynicism as to what is the underlying value for the business of doing this and, if there isn’t one, then don’t do it.”
June 2010 – to present Group Finance Director, easyJet
May 2009 – June 2010 Chief investment officer, EMI Music
April 2008 – May 2009 Chief financial officer, EMI Music
February 2006 – April 2008 CFO, EMI Music International
2004 – 2007 COO, EMI Music Europe
1998 – 2004 CFO, EMI Records group UK & Ireland
The European conundrum
Despite its UK roots Kennedy’s review soon revealed that easyJet was missing out on positioning itself as truly European player. “So one of the things we realised we had to do was make it European,” he now remembers. “After all, we’re a child of the EU, having grown as a result of the deregulation of the skies.”
As part of the review, the new management team went away and pondered what they wanted the airline to be. “And we came back with this: we want to be Europe’s preferred airline. So not the biggest, just preferred.” By this he means surpassing the UK tag to become an all-encompassing European brand.
This aim meant installing country directors, most of whom were country nationals, and devolving decision-making in a bid to offer passengers a more tailored product. “It’s simple really: in ski season you don’t advertise fly to ski in Switzerland because [the potential customers] are there already.”
But despite the current slump in economies across the continent, projections suggest that passenger volumes in Europe will continue to climb, and studies indicate volumes grow on multiple gross domestic profits. “So I don’t think even the worst hawks think that Europe is going to have GDP compound decline over the next 10 years. It’s going to go sideways but perhaps still 1or 2 or 3 percent passenger growth, and if we grow slightly ahead of that because we can take share, then there’s still plenty of growth for us to achieve.”
easyJet’s current geographical spread offers confirmation of that. It dominates on the low-cost routes to Spain, Switzerland, Portugal and Italy. But there are many untapped sources of passenger growth. Routes in the Nordics have barely been developed yet, similarly with Germany. In addition to that, Kennedy has high hopes for Europe’s fringe.