EasyJet Boosts Cash Reserves To Survive A Nine-Month Grounding Of Its Fleet

EasyJet said Thursday it has shored up its finances to endure a grounding of its fleet of up to nine months because it is impossible to know when it could resume commercial flights as most European countries are still in lockdown and COVID-19 travel restrictions firmly in place. The UK low-cost carrier grounded its entire fleet of 337 Airbus A320 family aircraft on March 30. “Our strategy, network and data science teams are working through different demand scenarios for re-starting flying, which could be done with as little as two weeks’ notice,” easyJet CEO Johan Lundgren said in a trading update for the six months ending March 31.

The company expects to report a headline pre-tax loss—this is excluding the impact of the over-hedging of fuel and foreign exchange—between £185 million and £205 million ($232 million-$257 million) for the first half of its financial year. That compares to a £272 million ($341 million) loss before tax in the same period last year. The airline’s performance was “very strong” prior to the impact of coronavirus, Lundgren noted. Passenger numbers rose year-on-year 1.7% in January to 5.9 million and 0.5% in February to 6.5 million but nose-dived 49.4% in March to 3.9 million. EasyJet cancelled about 20,000 flights in March. Revenue for the six months to March 31 rose by 1.6% to £2.3 billion ($2.9 billlion).

According to Lundgren, easyJet has taken “swift action” to meet the challenges of the coronavirus crisis and in a seven-week timeframe the company launched a comprehensive cost reduction program, clinched a deal with Airbus to defer the delivery of 24 single-aisle jets and negotiated a funding program. The cost cutting exercise reduced the operating cost cash burn running rate by three-quarters, to £30 million-£40 million ($38 million-$50 million) a week, while the aircraft deferral agreement and cancellation of a number of other projects has helped to drive a circa £1 billion ($1.25 billion) decrease in capital expenditure over three years. The different funding measures, varying from loans to sale and leaseback of aircraft, will add almost £2 billion ($2.5 billion) in extra liquidity when fully executed.

“These decisive actions mean that easyJet is well positioned to endure a prolonged grounding,” Lundgren said. “We remain focused on doing what is right for the company for its long-term health and to ensure we are in a good position to resume flying when the pandemic is over. While the vast majority of our people are not able to work at this time, there is a small number working tirelessly to help our customers, and to plan for our return to the skies, whenever that might be.” 

When considering its funding needs, easyJet analysed different scenarios based on the length of the grounding of its fleet. It anticipated it would use around £1.2 billion ($1.5 billion) in cash in a three-month grounding scenario, £2.2 billion ($2.8 billion) during a six-month grounding and £3 billion ($3.8 billion) during a nine-month grounding.

At the end of March, the company had a cash position of £1.4 billion ($1.8 billion). The different funding initiatives will generate additional liquidity of about £1.85 billion to £1.95 billion ($2.3 billion- 2.4 billion) leading to a notional cash balance of circa £3.3 billion ($4.1 billion), easyJet said. Following the funding measures, about 50% of its fleet will remain unencumbered.

The airline, however, warned it might need further financing or even state aid if the corona crisis continued beyond the worst-case scenario of a nine-month grounding. “Given the possibility of a prolonged grounding easJet will continue to consider further liquidity and funding options,” it said. It added there would be opportunities to further defer maintenance spending, further operational and organisational changes could be made, and “additional government support could be sought, around extended furlough leave and tax relief.”

EasyJet also warned that cancelling a £4.5 billion ($5.6 billion) contract with Airbus for 107 single-aisle jets, as requested by the low-cost carrier’s founder and 36% shareholder, Stelios Haji-Ioannou, might not be feasible. EasyJet has no ability to terminate the contract with European plane maker “by reason of force majeure,” it explained. “This is standard in aircraft purchase contracts.”

The London Luton-based low-cost airline also pointed out it would be liable for “significant”  compensation related to the discounts received on the 45 aircraft delivered to date under the 2013 contract and costs would increase as direct support provided by Airbus for the operation of its existing fleet would fall away.