Airline CEO Interview - easyJet

Transcript

Jonathan Wober:

Good morning. It's my great pleasure to welcome the chief executive of easyJet, Johan Lundgren, who joined the company, I think, three years ago now. What a time you've had to face Johan. I'm just going to start off by asking a slightly off-the-wall question. I read, according to my research, you started life as a trombonist, so I guess you've swapped one kind of metal tube for another. I was wondering if there was any relevance at all in that early career to your career in travel.

Johan Lundgren:

Oh, that's a good question. I haven't had that one. Is there any relevance to the... No, I think that I was very determined from quite a young age that I wanted to become a solo trombonist, and nobody told me really about the fact that there isn't a lot of demand out there for trombone soloists, so the demand and supply, it wasn't really something that I was quite well informed for, and look, I wasn't talented enough. Then, I decided to go into travel because I love to travel, and I love people, so it sounded to me like a great idea. Then, I worked myself through in various positions within the travel and hospitality industry, which has been all my working life now.

Jonathan Wober:

Yeah. I guess the demand for a solo trombonist is still even lower than the demand for air travel, even though it's very depressed, currently. Bringing us onto air travel, just to find out a bit more about your current levels of activity, you've said, recently, that the current quarter is 10% of 2019 seat levels. The December quarter, I think, you were at about 18% of 2019 seat levels and only 13% of passenger numbers. With this 10% of capacity that you've got in the current quarter, what passenger level do you expect? Then, more importantly, I think, because everybody knows we're in a lockdown, how do you see it progressing in the coming months and quarters?

Johan Lundgren:

Yeah, you're right. I mean, we're saying that we're not estimated to fly more than 10% in the quarter that we are in compared to the 2019 levels. The issue is, though, that the travel sentiment, it's so much depending on the daily news flow. Then, also, the biggest thing now we have is, of course, the restrictions that are in place to control the pandemic. One of the difficulties that everyone has to face when you're in this industry is the fact that these restrictions look very different depending on the jurisdiction, which makes it very confusing for our customers on one hand and tremendously challenging for the operators to operate in anything that reminds you of normal circumstances.

Johan Lundgren:

So, we have to be tremendously flexible in terms of our capacity planning, but the volumes are very, very small, and the volumes that are there are primarily domestic flying. There's very little international flying there in the first place. We didn't estimate that there was going to be a huge amount of flying in this quarter when we saw where this was happening prior to Christmas, but most important now is that the government's comes out with a plan on how they're going to unwind these restrictions that are in place, so we can look forward to a good summer because we know that there is underlying demand out there. This is not a question about demand. This is all about the restrictions that are in place. That is, of course, a consequence of the pandemic, which we completely understand is the first and foremost of the priorities here.

Jonathan Wober:

Eurocontrol, the network manager, recently put out some traffic scenarios suggesting that, even by June, traffic in terms of numbers of flights, but it's not that different to seat numbers, would be down by between 55% and 70% on 2019 levels even by June. If we're still talking about considerably reduced flights at that stage, I mean, where do you see it going after June? Are we going to get back to... We're not going to get back to 2019, but where do you think you might get back to in the best-case scenario?

Johan Lundgren:

Look, I think that there's a number of scenarios out there, but let's be very clear. Nobody knows. Nobody knows if it's going to be more or less than some of the stats you're mentioning. Of course, it's interesting to look at the scenarios, and some of them are based on some underlying assumptions that could well be true, but the fact is that this could change in a few weeks' time. If it is a continuation of a successful rollout of the vaccination program, is starting to have a better effect than perhaps anticipated, restrictions could be lifted earlier. Then, I think it's going to... can be an absolute boom on travel because it's such an underlying, pent-up demand that is out there, but the thing is that nobody knows what even this is going to look like in a week's time, nevermind what this is going to be in June.

Johan Lundgren:

But I'm positive for a strong summer if the vaccination programs are successful, if it works on the variants, if it works on the mutations that is out there, then we know that there's a big urgent need for the government to unwind these restrictions. Mind you, also, that there are many, many countries out there who are very dependent on tourism, so this is one of the priorities that they have in a safe way to get flying and travel going again. I think we can be very positively surprised if there is a positive continuation of the program of the vaccinations.

Jonathan Wober:

Well, I guess the two-sided coin for people like you, because you're Pan-European, you operate in many countries, but so you have more opportunity than airlines that are really focused on primarily flying out of one country, but you also have to face a greater level of uncertainty in the different governments' attitudes towards all of this. The travel restrictions have never been very coordinated at all. The progress of vaccination is on a different timeframe in different countries, and even if you've made great progress with vaccination, countries may decide to keep traveling restrictions because other countries haven't made the same progress. How do you even begin to plan your network in that kind of situation?

Johan Lundgren:

Well, we know that, for instance, if there are big variances between countries, and there will be restrictions that are tighter and harder in one country from another, the beauty of having an airline is, actually, you can move your assets. You can fly to different places. You can fly to where demand is. I think it's fair to say that the early indications of the demand that we're seeing for the summer is into the big, traditional holiday resorts, where people recognize that there's an infrastructure in place and so on, but if international borders are being closed, well, then it's going to be much more focused on domestic, as an example. I mean, once in all, you could see... Like I said, it's a scenario.

Johan Lundgren:

It doesn't mean that it's perhaps likely to happen is that you can see a very, very strong domestic flying. If you're taking a look at what we already do today, out of that 10%, and up to 10% we talked about in the quarter, that is primarily UK domestic, France domestic, and domestic in Italy. Very little goes international. Of course, if one country feels that they are now in control of this but decides to have restrictions in from international travel, well, that's going to be reflected in the program. So, we have done a number of these scenarios, and we want to wait as long as we possibly can before we start operating them, and putting them on sale, and getting the crew in, and start looking at the capacities versus that demand as long as we can get the latest information to the restrictions because it is the restrictions that are really, really the key here.

Jonathan Wober:

Okay. You mentioned, obviously, currently the capacity is primarily domestic, but looking ahead to the forward bookings that you have for the summer, presumably the mix is more tilted towards international at that point.

Johan Lundgren:

Yes. You're right. Like I said, it's primarily the holidays, the big leisure destination resorts that indicates that there's a demand on, and we know that leisure and holidays is going to recover quicker than business travel, as an example. We did a study here across five of our main core markets here earlier in the year in the start of January. It was no doubt that the primary purpose for the travel, for those people who wanted to travel, was to go on a holiday, to take a break. It was way over and above what came in second place, which was visit friends and family. Then, in third place was business travel, as you can imagine, so we know. This follows the same trend, by the way, that we've seen in any downturn, in any crisis. Holidays and leisure recovers one to two years earlier and quicker than business travel. I just think that we don't need to do any more service to... or studies to recognize that people want to get away onto the holiday.

Jonathan Wober:

Coming out of this... Sorry. Coming out of this particular downturn, business travel's always the slowest to recover, but isn't there going to be a structural change in the demand for business travel? We can do what we're doing now. We don't need to travel for business.

Johan Lundgren:

I don't agree. I really don't agree. I mean, there are various studies being done on that, and some suggest one thing. Some suggest some other things as well. Look, there is no doubt that I think that this pandemic has shown us not all the opportunities with technologies. It's also showed us the limitations. There is no doubt that this works fantastically if you're having meetings with people that you know, or it is a one-on-one conversation such as this, but when it comes to establish new relationships, when it comes to talking with more than one person, if you want to have a creative debate, if you want to start looking into complexities, if there are difficult decisions that needs to be made, meeting in person is far superior.

Johan Lundgren:

I also think, underlying, that people and humans are social creatures. They want to do this. They want to meet, and they want to travel. They want and go establish those relationships, so I don't believe for a moment that there going to be a structural shift of any significance. I'm sure there will be some changes, but don't forget, there will also be general underlying growth. You would remember, and people who are old enough to remember 9/11, was a big debate then about, "Oh, travel will never be the same again. People won't fly in anywhere near to the extent that they've done before." Well, there were some security restrictions put in place and different procedures in airports and in the aircraft, but a couple of years later, there were record levels again.

Johan Lundgren:

You go back to the global financial crisis, 2007, 2008, was a big discussion then on, "Business travel will never return. You're never going to be able to sell a business class seat, particularly on the European level." Took a couple of years, and then we'll start booming. I think that it's difficult when you're standing in a moment in time, and you take all that information that you have, and you don't think about what the underlying trends historically are and drivers within these things to learn what the future's going to be. If you've been long enough in the business, and I've been longer than most, even back to the Kuwait wars in the '90s, these are things that I remember. "Oh, this will never happen again." Well, it takes a couple of years, and then it's back again.

Johan Lundgren:

I do think there will be changes to certain things. That's not what I'm saying. I think, for instance, we know that sustainability will be a much more important topic. I think people will make more careful choices about companies they choose for product and services when it comes to who delivers something that has the least amount of pressure on the environment. We know that.

Jonathan Wober:

I want to come on to sustainability a bit later, but thanks for-

Johan Lundgren:

Sure.

Jonathan Wober:

... the response on business travel. I just want to change tack a little bit, talk about your London airports strategy. I mean, Gatwick, obviously, has been your biggest airport for a long time in London, but recently, it's become even more the case that you've focused almost exclusively on Gatwick. I mean, is it the case that you won't... Stansted, Southend are just history for you, or will you go back there? Or, what's your thinking in terms of how you manage London going forward?

Johan Lundgren:

Well, one of the core strategies of easyJet, and it's always actually been the case, and it will remain so, and I think what we've done with Gatwick reinforces that, is to have leading positions at the primary airports. That really sits at the heart of the business model of easyJet. While we also have to adapt ourselves to an environment, which, for a few years, will require less capacity. That means that we also have taken a look about how we optimize the network and how we allocate the fleet that we have available that matches overall demand. When you do that exercise, we saw that there was an opportunities for us to focus more and get better traction from something that is already working well for us today. I think that, as you said, we have increased the capacity there with four aircrafts based there for the summers.

Johan Lundgren:

We now have a record level of 71 aircrafts in there. That means that that has had consequences in general. We took a look at the London as an area and decided that our key focus was going to be in Gatwick and in Luton. We continue to look, but here's the thing. To your question, is this we're never going to go back there, well, that's not how it works. If we see, in the future, there are opportunities to create positions based on the fact that we can have a leading positions at some of these airports, we will always look to do that.

Jonathan Wober:

Yeah. I'm old enough to remember easyJet going into Gatwick, and it was seen as an opportunistic move at that time. I remember, yeah, Stelios talking about how you could get a better yield there. I guess that's-

Johan Lundgren:

Yeah. Yeah. Well, it's interesting. Our model works, and this is no secret, and you would know this. Our model doesn't work very well if we don't have scale. We need to get to that scale because then we get a presence in the market. That's where we're getting the efficiencies in what we do. Now, you can go in and have a lower amount of aircraft if it is a smaller airport, but clearly, you got to get up to that 10-aircraft size when it really starts ticking. Doesn't mean that we can't make it work on smaller. We have a number of very good performing bases that has less than 10 aircrafts, but in general, that is the case, and that's what we are following.

Jonathan Wober:

Okay. Thank you. In terms of being able to develop at Gatwick, I mean, you picked up some slots, I think, from Norwegian, but in a sense, you've also benefited from the suspension of the 80, 20 slot rule. If you don't use your slots, you have to give them up again. The suspension of that rule has meant that the likes of Wizz Air, for example, who've been really keen to get into Gatwick, haven't been able to develop their own the way they wanted to. So, I mean, where are you on the sort of slot debate because there are those who see it as a very important thing to allow incumbents to continue without having to fly into flights and all those crazy things that can happen if you're forced to use those slots? But on the other side of the coin, for new entrants, it's been a really difficult thing for new entrants to get into markets. Where are you on that debate?

Johan Lundgren:

This is complete nonsense. That argument is complete nonsense.

Jonathan Wober:

Which one? I gave two.

Johan Lundgren:

The fact that this is restricting competition in any case. They can fly as much as they want. We are handing back to slots. Prior to departure, they can fly as much as they want there, and while people been talking about these things, we have actually acted and added on another four aircraft. This is noise. You've got to cut through the noise here, and this is a nonsense debate, and everybody recognizes this, apart from one or two people and companies out there. This is the reason why it's actually have them being extended into the summer. The whole idea that we would then be forced, any airline would be forced, in order to keep their slots, to fly around empty, that is an awful proposition from a sustainability point of view.

Johan Lundgren:

It bears no social responsibility around that as well. There's no evidence that this in any way restricts competition at all. Like I said, we acted on taking on the two Moscow slots, as you know, in Gatwick. We now done a deal with Norwegian in this case. This is a free market. Everybody can do what they want to do, but we have acted on it. Like I said, slots are handed back when we don't fly them, so everybody can fly them. Nonsense. Absolute nonsense.

Jonathan Wober:

Okay, clear on that one.

Johan Lundgren:

[crosstalk 00:17:45]. Am I clear on this?

Jonathan Wober:

I think you made the point. Yes, thank you. Moving on to your fleet plans. I believe that you're reducing the total number in the fleet in the current financial year, but overall, I mean, where do you see the fleet going beyond the current year?

Johan Lundgren:

Yeah, one of the key principles that we had... We had this as early part of this crisis... was that we decided internally that we don't know for how long this is going to last. We were not one of those airlines who said, "Oh, this is going to be over by Easter or by the summer." We don't know the extent of this, and we still don't know. We talked about it early in your first question of what the capacity is going to be going forward. We don't have that visibility, so what do you do then? Well, what you then need to do is to make sure you have the flexibility, both to adapt yourself to lower levels of demand, but at the same time, be able to scale up if you see that demand comes back quicker and sooner perhaps than you anticipated.

Johan Lundgren:

So, we've set up, and that's more used to build on anything that we believed it was going to take us up until 2023 before we saw 2019 levels coming back. Now, that might be '24. It might be '22, but, but the most important thing then, what we did when we decided on this, that we need to have flexibility in what we're doing. The amendments that we have done in the agreements we have with Airbus and also our planning in terms of how we can return aircraft to lessors is all about that, to have that gap and have that yaw in your fleet plan, so you can adapt yourself to lower levels but, at the same time, also have capacity that is needed to go up to more capacity. I don't think that there's anyone, from what I can tell, that has that flexibility in terms of how we can scale up and also adapt ourselves to a prolonged period where less capacity will be needed.

Jonathan Wober:

Okay. I mean, what would you say to those who would say that, compared to, let's say, Wizz Air and Ryanair, who've been more aggressive, I guess, in their fleet plans... I mean, they're not planning reduction in the number of fleet. They're planning on continued growth, certainly Wizz Air very clearly. Although it's reduced the growth, it's still planning to grow every year through the crisis.

Johan Lundgren:

[crosstalk 00:20:05].

Jonathan Wober:

They're saying there's opportunity to take market share when the demand recovers. I guess having a growing fleet helps them to do that. Why are you more cautious than they are?

Johan Lundgren:

Well, I don't think we are more cautious. It's just that we don't boast about anything while there's insignificant amounts of flying. I mean, some of these airline hardly flies anything. You can talk as much as you want to what you're going to do in the future, but you don't know what that's going to mean. We took the view very early on to say that, "Look, we don't know the extent of this." I mean, some of the players you talked about here, they were wildly wrong on their assumptions on how much flying that was going to be done last summer. If you compare to what they said they were going to fly compared to what they actually did fly, it's a huge gap in there. That costs money because you're setting yourself up for a cost base for more capacity than you're actually flying and you're getting revenue into.

Johan Lundgren:

We had a very clear principle. We're only going to do, to the extent possible, any flying that generates a positive contribution to what we do. That means that we tended to be much more accurate in terms of our capacity that we operated, and what we put on sale, and what we turn out to operate. I think that is something that, as you see going forward, as well matters, but we're not more cautious on it. I just think it's irrelevant when you're hardly flying anything to talk about and boast about how big you're going to be and what your market share is going to be, but we have tremendous opportunities. Two-thirds of the capacity used to talk about the landscape from a competitive point of view that meets easyJet is from legacy carriers. They are from the big legacy carriers that exist.

Johan Lundgren:

In Europe, we have insignificant or, I mean, two, 3% overlap with Wizz. Ryanair is 14, 15%, so the big overlap sits with the legacy carriers. We know that there are retrenchments there, and we are absolutely going to take the opportunity to grow when that demand is there and when the opportunity rises. Gatwick is, once again, a good example, and we'll continue to look at other examples we have, but to talk about that when there's hardly any flying at all, I think that's just a more irrelevant than anything else. What matters is, actually, what you have planned to do. We plan to have the flexibility to be able to grow, definitely take share and definitely build on the opportunities we have, but we also got to face the reality that there might be some time here with some suppressed demand, and that's what you then got to work out and see what you're going to do to come out of this in the best financial way that you possibly can, but we're not more cautious in terms of that. I just think that we are more prudent in the way we planned this.

Jonathan Wober:

Okay. As you start to grow capacity back again, and I know there's an awful lot of uncertainty as we've already discussed in terms of how quickly and to what levels that might happen, but will the focus be on reproducing the network as quickly as possible with very low frequencies, or will you build a smaller number of routes with higher frequencies? What will the emphasis be?

Johan Lundgren:

It's all about what demands we see and all about what generates the best return for us as a company. Of course, if you're getting a lot of frequencies in there, you're getting scale. You're getting efficiencies, which is, in one way, better than to spread yourself thin across a larger part of the network and run thin programs. Of course, you want to do the former, but as always, you strike a balance in that, and we have pretty advanced models on how we can evaluate and assess the demand through the different scenarios and inputs we have. That's why, once again, it matters to be very, very flexible to adapt your network and the program to what gives you the best return.

Jonathan Wober:

Okay. One of the things that some people find surprising for an airline that's a low-cost airline is that you're currently going through a significant cost-reduction exercise. Can you talk a bit about that? What are the key elements of how to take costs out of the business?

Johan Lundgren:

Yes, it is true. I mean, we have launched the biggest cost-out program in the history of the company. This was partly down to wanting to resize the company, and build productivity, and increase, and improve the productivity levels that we have because we did see that, in this environment that we're in, first of all, we wanted to right-size the organization. But also, as we went through the programs and the discussions we've had with the unions in that process, where there was a big risk of large redundancies in there, we negotiated that a big part of the crew has come on to part-time contracts, which have saved us from doing a lot of the compulsory redundancies that could have been the case, and they also given much more flexibility for the company and also much more improved productivity for the company.

Johan Lundgren:

One of the things is also to say that, look, we'd gone through every, every single aspect of the cost in this company. Like I said, there are two principles behind this. We wanted to make sure early on that we came out of this one relative to others in a better place, relative to others in a better place, and as far as I can tell... but this changes all the time because actions are being taken also by the other airlines. As far as I can tell, I don't think that anybody has done, in terms of a cost perspective, what we have done, and this is important because this will not only give us better margins going forward, but it also is a very good underlying thing if you want to look at growth again.

Johan Lundgren:

You would know this, but one of the things that is dangerous about growing is that it flatters your cost base. It hides inefficiencies in companies in general because everything starts to look good when you're putting on lots of capacity year after year, but one of the things that we have done throughout this process is really to make sure that we turn every stone in this company and looked underneath it to see how can we be more efficient, how can we be more productive. If the cost isn't generating revenue or drives a superior customer satisfaction experience that, in its turn, drives more loyalty, then it should go. We've been pretty brutal on this, and it's been difficult, and it's been uncomfortable decisions to make, and it's had an impact on people, but ultimately, you got to take decisions that you know is going to be the right one when you look back six, 12, 24, 36 months from now. That's what you got to do, and we always have that in our mind.

Jonathan Wober:

[crosstalk 00:27:04]. It gives you, hopefully, a more flexible cost base in the future.

Johan Lundgren:

Yeah.

Jonathan Wober:

Never waste a good crisis is what they always say. We've only got a few minutes suddenly. There's a number of things I still wanted to touch on, so I want to move on to... You've raised a certain amount of capital over the crisis. You've benefited a little bit from certain government schemes, the COVID Corporate Finance Facility in the UK and a loan backed by the UK Export Finance agency. Where are you in all of that, where you need to raise more capital at some point?

Johan Lundgren:

Once again, it came back to one of the principles we had that we didn't know for how long this is going to last, so we thought it was very important to get liquidity and get access to cash from a wide variety of sources because what we wanted to do was to always make sure that we can determine where we get the best terms. We have raised over four and a half billion pounds since this started, the pandemic. We have options, and we have choices, and we got very good deals and very good terms on those things. That's what we want to continue to do. We think we're in the appropriate position right now, but this doesn't stop. We'll continue to review, and we'll continue to look at the options we have available for us to always make sure that we have a good amount of cash available as we go through this pandemic.

Jonathan Wober:

You've done quite a lot of sale and leaseback, but is there more you could do on that, or is that no longer something that you would consider?

Johan Lundgren:

No, we could do more of that. We managed to get good price tensioning as we proceed through this, so this has been good deals for ourselves. We are a very attractive company to work with, to do these transactions with. Our kit is in excellent condition, and we're considered a safe company to do these types of transactions with. We still have ownership of more than 50% of the fleet, and about 40% of the fleet is unencumbered, so we still have the opportunity, but we want to weigh up that alternative compared to a number of other options that is out there, but we have been really pleased with the deals that we've had on the SME transactions that we have done to date.

Jonathan Wober:

You mentioned the word sustainability, but earlier on, I said I wanted to come back to it, so now is the point to come back to it. I don't want this to be only about easyJet but aviation as a whole. The crisis has obviously reduced the amount of flying. There are those who say, "Great, we don't want to go back to flying," and that we should reduce aviation's carbon footprint by reducing the amount of flying on a permanent basis. How do you address that kind of argument?

Johan Lundgren:

Well, the point is not to reduce flying. The point is to make sure that aviation has less impact on the environment. To only look at the demand side on this to say, "Well, we should introduce taxes," or, "We should make it more expensive for people to fly," that's an awful, awful way of looking at it because it drives social inequality. It means that you go back to the days before the deregulation in the middle of the '90s, where this was also something that was available for wealthy and privileged people. Companies such as ourselves have allowed millions and millions of families and people to enjoy this product and service that wasn't there before. To now, from a sustainability point of view, think, "Well, let's restrict that," it will only drive to lower load factors, less efficiency, and that this is a product and service that is available for the wealthy.

Johan Lundgren:

That's an awful proposition to do. What we need to do... This is the danger with the pandemic because it has removed, clearly, funds from the industry to invest into new technology that was so desperately needed. I think you've seen that some of the commitments that some airlines has been doing has been withdrawn throughout this. I think we are the example. We haven't done that. First of all, we are one of the few, if not the only major airline in the world, who is offsetting all the carbon emissions from the flying we do, and we're staying with that commitment. We know that this is a solution. There is a bridge before we get onto more groundbreaking technologies, such as hydrogen or electric, which we are big believers in, but that's going to take 10, 15 years before we get into to that having any significant impact.

Johan Lundgren:

Up until then, the carbon offsetting schemes with the quality projects that we have are absolutely essential. It's an absolutely appropriate solution to do at this moment in time. If you want to fly with the least amount of impact on the environment, you've got to choose easyJet. There's no doubt about that. We know that customers coming out of this crisis is going to pay more attention on these things, so we would urge any competitor that's out there to follow us because that would be better for the environment and better for the industry as a whole.

Jonathan Wober:

Yeah, it's obviously a huge topic. We need a multiple-day conference on that topic alone. Final question because we are out of time. What new opportunities has the crisis presented to easyJet?

Johan Lundgren:

Well, I think, one, you can look at the competitive landscape. I think it's going to be a situation where the relative weak players that was out there is going to be even more weaker. If you're strong in coming out of this in a strong phase, it's going to give you more opportunities from that point of view. I think that, for us, who has positioned us with the sustainability as one of the key things that matters to ourself in terms of reducing the impact, we're going to have a preference for that. We've talked about resetting the cost space, which is something that is going to also generate better margins going forward and also greater opportunities for growth. Also, we have been looking, going through the ancillaries that we've been doing, and we've done already changes to the gap, the cabin bag policies, which are going to help us be better on on-time performance but also a source of revenue.

Johan Lundgren:

We have launched holidays, easyJet holidays, back a little bit more than a year ago, which the timing of this is actually phenomenally good because of the fact that so many competitors fallen out of this space. We know holiday is going to be really at the key purpose for people to travel. So, we've got a tremendous... a lot of opportunities here, but you know what? We got to manage through the situation we are in. That's what we're planning. We're planning for that to come. We want to lead coming out of this recovery, but at the same time, we also got to be realistic on where we stand today, and manage through the situation, and get ready to lead the recovery when restrictions are removed and eased.

Jonathan Wober:

Okay, good to end on an optimistic note. Thank you very much for your time. I personally am looking forward to getting on a plane again, maybe flying somewhere to see a concert with someone playing a trombone somewhere in Europe. Thank you very much for your time, Johan. It's been a great pleasure. Thank you.

Johan Lundgren:

Thank you.

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