Will no frills pay off for easyJet?
Low-cost airline easyJet will tomorrow reveal whether its 'no frills' policy yields high profits as it reports its first interim results since flotation.
‘Successful low-cost airlines are a combination of volume and margins,’ easyJet’s financial director Chris Walton told Accountancy Age. He added: ‘Although we sell tickets at a low price we also simplify everything so as to cut operating costs.’
The unconventional finance director, who is Australian and holds a pilot’s licence, explained easyJet’s business model: ‘We cut out the middle man, and there are no frills or luxury. Fares are lower but our business model is simple. Our passengers just want a simple and safe way to arrive at their destination,’ he added.
One example of this can be found in easyJet’s catering policy: it does not offer food to everyone, but sells sandwiches to those who want them.
But in addition to lowering costs of a ticket, there are other savings to be made by cutting food out of the equation.
‘In conventional airlines people are locked into their seats for half an hour while food is served, they eat and then there is a queue for the lavatories,’ said Walton.
By not offering meals, easyJet cuts down the demand for lavatories. ‘So we have taken out one lavatory and put in seats instead,’ he added. ‘We can also space out rows so people have more leg-room. This also means less rubbish, so we don’t have to hire professional cleaners – the staff can clean the aircraft.’
The company’s accounting is also simple and depends highly on its internet distribution system, which the company claims makes up 85% of its bookings.
It is done mostly with accounting software and very little manual intervention. Walton said because of this ‘at the end of each flight we can tell the profit – a luxury most airlines don’t have.’ ‘We can do it because we’ve designed a very simple business – it is like an aerial bus service – we use technology that is very extensive,’ he said.
Walton, who holds an MBA, is not a qualified accountant.
‘I’m academically qualified,’ he said. ‘My university degree gave me all the courses necessary to become a qualified accountant, but I did not want to go through the necessary training to become a technical accountant, my interest is in finance, not technical accounting. The technical side I’ve picked up and built on from experiences’.
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Final results to 30 September 2000
Revenue: £263.7m
Pre-tax profits: £22.1m
Market capitalisation: £959m
Valuation (at time of flotation): £777m
Executive directors: Stelios Haji-Ioannou, chairman and founder; Ray Webster, chief executive, appointed 1996;
Chris Walton, financial director, appointed December 1999
Auditor: KPMG Audit
Company profile: EasyJet took off in November 1995, offering two routes from Luton to Glasgow and Edinburgh. It now offers 35 routes from 16 European airports. Listed on the London Stock Exchange on 22 November 2000 and is based at Luton Airport.