The growing value of airline brands: easyJet resolves dispute with Sir Stelios

The revised agreement, which CEO Carolyn McCall described as a "sensible resolution", confirms easyJet's right to generate revenues from ancillary activities (as the previous 72:25 rule constraint on ancillary revenue is removed) giving the carrier "operational flexibility" and "commercial freedom" to grow its businesses through such circumstances as co-branding and promotion with other 'reputable' brands.

In return, the carrier will award Sir Stelios, who founded easyJet in 1995 and remains the airline's largest shareholder, 0.25% of annual revenues (forecast at GBP3.25 billion in 2010-2011) starting with two years of fixed payments of around GBP4 million and GBP5 million respectively, a massive increase from the existing token GBP1 annual payment. easyJet stated the agreement is worth around GBP65 million to Sir Stelios over the next decade (based on current prices).

The agreement resolves the long-standing legal dispute and High Court case between the two companies which Ms McCall labelled as an "incredibly unhelpful" battle that has cost easyjet around GBP4 million in legal costs alone since Jun-2008. It will, importantly, end much management and board distraction and enable the carrier greater control over its future revenue development and strategy. However, the two parties stated the agreement was a separate issue from Sir Stelios's disagreement with easyJet over its business strategy (Sir Stelios favours a slower growth strategy).

Commenting on the agreement, easyGroup Chairman Sir Stelios Haji-Ioannou commented: "The way low cost airlines make money has changed over the 10 years since the original licence was signed. This amendment allows the airline to now grow its business even further by removing some of the restrictions imposed by the original agreement. I am content this is a fair deal for both sides. The agreed amendments will result in increased competition from the airline for the other easyGroup licensees (such as easyHotel, easyCar and easyBus). However the agreed royalty payable provides appropriate remuneration for easyGroup, thereby aligning the interests of both parties. Let's hope this is a win-win for all concerned!".

None of the other, "competing" easy"-branded products existed at the time the airline's licence was drawn up, so there is some logic in the compromise. Similarly, easyJet Chairman Sir Mike Rake noted that "easyJet has grown and developed since the brand licence".

(For more information on the details of the agreement, see bottom of this report.)

The growing power (and value) of the airline brand

The agreement highlights the power of branding for airlines. While it is well known that airlines invest significantly in brand differentiation and awareness, with airlines regularly featuring in lists of the most powerful brands as a result of their efforts, this agreement puts a monetary value on the value of the easyJet brand.

Sir Stelios stated the fees involved in the agreement should be measured against the fact that easyJet is one of the best-known brands to have emerged in Europe over the last 15 years. The name has around 99% brand awareness in the UK and growing Europe, according to Ms McCall, who measured the impact of the withdrawal of the easyJet name against the payment terms under the agreement. There had been suggestions that the carrier was preparing contingency names in case of irreconcilable differences with Sir Stelios.

By way of comparison, Australia's Virgin Blue Holdings pays Sir Richard Branson's Group 0.5% of sales for using the Virgin name. Sir Richard was one of the founders of the domestic startup LCC. Meanwhile, the carrier has also faced branding challenges related to its plan to own the Virgin and V names. In 2009, Virgin Enterprises blocked Virgin Blue's attempt to trademark V Australia for its trans-Pacific carrier. Virgin Group, which has a 26% ownership position in Virgin Blue and puts its name to a number of products and companies, collects up to GBP40 million annually from companies using the Virgin name.

Meanwhile, AirAsia X, in which Virgin Group also has an ownership position, has a 30-year brand licence agreement with parent AirAsia, enabling the carrier to continue to use the AirAsia brand after it becomes a stand-alone company. The carrier will also continue to use the airasia.com website as part of the Brand License Agreement signed in Jun-2010, with the agreement to remain in place even as the carrier becomes a stand alone airline - although AirAsia will remain closely related to its long-haul affiliate.

As LCCs around the world, and particularly in the Asia Pacific region, expand through JV agreements, the value of the airline brand will no doubt come into focus. None of these new brands, unlike most of the incumbent flag carriers, is confined by national geography, but either cover wide regions or are regionally neutral. Air Arabia, Tiger Airways, AirAsia, Jetstar and the Virgin Group are all expanding their network, regional focus and brand awareness through JV agreements, with the issue of branding likely to emerge for these carriers too.

Thus AirAsia has joint venture subsidiaries in Indonesia and Thailand, each benefiting from carrying the central brand; Singapore's Tiger Airways has a Tiger Australia operation and is about to commence a joint venture, Thai Tiger operation based in Bangkok; Air Arabia is also now established in Morocco (Air Arabia Maroc) and Egypt (Air Arabia Egypt) and is planning a similar start up in Jordan.

A slightly different example, with no geographical link, is flag carrier Qantas' wholly owned subsidiary, Jetstar, which is established not only Australia (as a domestic and international operator), but as Jetstar Asia in Singapore and as Jetstar Pacific in Vietnam.

Each of these airlines is actively searching new establishments in other Asian countries, including Korea, Japan and India. China remains a standout, still officially frowning on LCCs, although permitting international operations by foreign LCCs.

easyJet upgrades earnings outlook

Earlier in Oct-2010, easyJet updated its full-year profit before tax guidance to slightly above GBP150 million, the top end of its previous expectation of a GBP100-150 million profit for the 12 months ended Sep-2010.

The LCC stated total revenue per seat was up 6% year-on-year on a constant currency basis in the fourth quarter (up from previous guidance of 3%), while losses related to the Icelandic volcano would be about GBP60 million, or GBP5 million less than previously forecast. The carrier added that it has witnessed "robust" traffic growth, as passenger numbers increased 7.9% year-on-year to 48.8 million in the period, with load factors strengthening by 1.2 ppts to 89.3%. Particular strength was noted on UK beach and city routes through the summer.

However, the carrier raised concerns regarding the ongoing official and unofficial strike by air traffic controllers in France, Spain and Greece, which is expected to cost the carrier up to GBP6 million in customer compensation for flights cancelled in Sep-2010.

easyJet is scheduled to release its FY2010 results and outlook on 16-Nov-2010.

APPENDIX: Details of the easyJet brand agreement

Key features of easyJet new licence/brand agreement with Sir Stelios

Use of easyJet brand	The agreement continues easyJet's worldwide rights to the use of its brand on a basis that protects easyJet's current commercial activities and provides clarity and certainty over the terms of the licence. The agreement replaces the existing Brand Licence Agreement entered into in 2000, prior to the listing of the ordinary shares of easyJet on the London Stock Exchange.
Terms of agreement	The rights will continue for a 50-year term from 01-Oct-2010, with a minimum commitment of ten years in return for an annual royalty payment of 0.25% of easyJet's revenues. The payment is fixed at GBP3.9 million and GBP4.95 million respectively for the first two years of the agreement. On the 30th anniversary of the licence, the parties will conduct a good faith review of its terms which may lead by mutual agreement only to an upward review of the royalty rate (but not downward). The annual royalty previously stood at GBP1 p/a but was subject to certain limitations, for example in relation to the extent of the revenues to be derived from activities ancillary to the carriage of passengers and co-branding.
Ancillary revenues	The restriction on easyJet's ancillary revenue growth (the so called 75:25 rule) which has been the principal subject of the recent High Court litigation is removed.
Co-branding	easyJet will have the freedom to enter new co-branding agreements with other travel service providers as well as white label partners such as car hire, hotels and travel insurance companies. In addition, easyJet will have the right to enter co-branding promotions with other leading brands. The deal would mean easyJet white label services related to passenger travel, such as car hire and hotels, would likely be preceded by the slogan "brought to you by easyJet" and not the "easy" prefix, according to Ms McCall.
Executive news	easyJet, easyGroup and Sir Stelios entered into a Deed of Termination terminating the Relationship Agreement without liability. This will bring to an end the contractual right of easyGroup to appoint up to two non-executive directors of easyJet and the additional right of Sir Stelios to appoint himself Chairman of easyJet.
New products/services	The agreement gives easyJet the right to provide any new product or service which is, when easyJet commences provision, provided by at least one competitor airline, subject to a list of prohibited categories of business including financial services, telecoms, gaming, high street retailing, office accommodation, fitness clubs, food offerings, end-to-end courier services, entertainment and media, cruises and ferries, fashion & cosmetics, healthcare, recruitment, social networking, railways coaches & buses, construction, manufacturing and the automotive sector
Aircraft	The agreement provides freedom for easyJet to lease-in non easyJet-branded aircraft to meet operational requirements within annual limits without the need for easyJet Group consent (as is currently required). The carrier will also have freedom to lease-out aircraft to other operators within annual limits without the need for consent
Brand protection regime	The agreement includes a new brand protection regime, with all enforcement costs for easyJet Group to protect both the "easy" family brand and the "easyJet" brand to be shared between easyJet and the Group on a ratio of 10:1 up to a combined cost contribution of GBP5.5 million for any individual action, after which all costs will be borne by easyJet and easyJet will have the right to conduct the action. The agreement also provides details of procedures related to the termination of the licence and the process for a potential sale of the easyJet brand. Sir Stelios also entered into a separate agreement under which, in return for a fee of GBP300,000 p/a (net) for a period for five years from 01-Oct-2010 to not licence the easy brand or his own name (or derivation) to any other airline for a specified period of time. The agreement also specifies that Sir Stelios is unable to sell his shares in the easyJet brand or easyJet Group for a specified time.
Costs of non-action on brand agreement	It has been estimated that approximately GBP3-4 million p/a of revenue was at risk in relation to easyJet's ability to continue selling current "white labelled" activities had the judgement of the High Court in the brand licence dispute found that easyJet had been providing such services outside the terms of the licence. The further alternative of rebranding the business, including nearly 200 aircraft across 27 countries and 110 airports within the 90 day time frame as stipulated in the licence would have been logistically very difficult and meant easyJet's flying programme would have been disrupted. Rebranding in such a short period of time would have meant the business incurring significant costs and presented an unacceptable potential risk to revenues, according to the carrier.
Required approvals	The agreement still requires independent shareholders to vote on the revised agreement. Ms McCall said she was confident the agreement would get shareholder backing, commenting: "We have already spoken to shareholders over the weekend and they have been very supportive of this. They see it as a good brand licensing agreement for all sides".

Source: Centre for Asia Pacific Aviation & easyJet