Not so easyJet: Low-cost carrier turns down takeover bid

October 3, 2021

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3 min read

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What's going on here?

European low-cost airline EasyJet has turned down a bid from rival budget carrier, Wizz Air, as the ground shifts in the fragmented European airline market.

What does this mean?

Wizz Air, founded 20 years ago in Budapest, has grown into a significant player in the volatile short-haul European market. The market had experienced bankruptcies prior to the coronavirus pandemic, which was disastrous for the market as borders closed and holidaymakers remained at home.

EasyJet, another big player, has recently announced a ÂŁ1bn rights issue, this would introduce an influx of money by selling additional shares, in an attempt to prop up its balance sheet in the aftermath of the pandemic. The fluctuating market has proved just that. Other competitive and ambitious firms seek to position themselves in a post-Covid world, as cash-poor airlines have to rethink their strategies for a far more digital world than the one they know. For example, British Airlines is seeking approval for a host of changes to its short haul operations, shifting focus towards Europe to compete with the likes of Ryanair.

While the industry has reeled over the past year, Wizz chief executive, Jozsef Varadi, and Ryanair boss, Michael O’Leary, have remained bullish about their respective companies’ prospects, touting themselves as ultimate winners in the pandemic. Both see opportunity for expansion and consolidation in the crisis.

Varadi has been aggressive in pursuing extra landing spots and aircraft, as well as in restarting operations. This aggression has led to a schedule which would see more passengers flying with Wizz in the final three months of 2021 than in the entirety of 2019. Investors have rewarded this ambition, sending Wizz shares to all-time highs. EasyJet is yet to recover, either in terms of capacity or share price, meanwhile.

What's the big picture effect?

The pandemic could see a complete restructuring of this fragmented market, where the many low-cost carriers and legacy airlines active in Europe are consolidated in a wave of mergers and takeovers. This would bring it more in line with the US market, where four main players control the bulk of routes, hubs and passengers.

The bid for easyJet can be seen as an acceleration of Wizz’s expansion into Western Europe. Previously, it has been much more prevalent in its home Eastern European market but had been seeking to increase its capacity elsewhere. This deal would have provided enormous growth opportunities in Western and Northern Europe for Wizz, accelerating its timeline by several years. This could have been emphasised if its rivals who have found themselves in weak positions are forced to retreat.

However, according to easyJet chief, Johan Lundgren, “significantly undervalued” the airline, as Wizz sought to capitalise on easyJet’s deflated share price.

Wizz has been able to grow into one of the industry’s largest companies in large part due to its extreme low-cost strategy, rivalling leader of the pack, Ryanair. Bernstein, a researcher, suggested it may even operate at lower costs than Ryanair, though O’Leary, when asked about this by the Financial Times, dismissed it as “bullshit”.

EasyJet has moved in a different direction, aiming to eat into the national carriers’ market share by offering a slightly more expensive service and flying more expensive routes. This makes the potential merger seem unusual, as Wizz would be forced to incur the higher operating costs of easyJet, which undermines the strategy which has brought it so much success.

EasyJet may find itself vulnerable to future takeover bids, however, as it finds itself in this uncomfortable middle-ground, without a clear identity or a well-defined customer base it can lean on as its competitors cling to theirs.

Report written by Joshua White

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