market folly

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Gary Channon of Phoenix Asset Management who pitched a long of Easyjet (LON: EZJ).


Gary Channon's Presentation at London Value Investor Conference

Phoenix is a UK focused fund that since inception in 1998 has returned 12% annualised vs the 4.9% for the UK benchmark.

Long: Easyjet (LON: EZJ) 

There is an intrinsic human desire to travel. GDP per capita and the cost of travel drive the overall market. Air travel has been doubling about every 12 years. Yet airlines have been terrible businesses except for Southwest Airlines in the US. The Southwest model has been copied by both Ryanair’s and Easyjet’s founders.

It is often assumed that Ryanair and Easyjet are competing. Ryanair is thought of as the low-cost producer and to be more effective than Easyjet. Channon argued that the two airlines have different strategies and are not competing. They do not fly the same routes – there is only 4% overlap. This is not an accident but a deliberate strategy. Easyjet takes customers from convenient airport to convenient airport. Ryanair is low cost - inconvenient airport to inconvenient airport. Both companies produce a similar return on capital.

Easyjet has a moat which is underappreciated by the market. The moat is derived from the slots it owns. The slot is the right to take off and land at a certain time on a certain day. The slots are regulated by quasi-legal international conventions referred to as Grandfather Rights. The slots belong to the airlines not the airports. A slot can provide pricing power if it is at a sought-after airport where demand outstrips supply. The lack of runways in the UK and Europe and the failure to build new ones guarantees a shortage of supply. Because of the value of slots airlines tend to be against the expansion of runways while the owners of airports tend to be supporters.

The slots provide a barrier to entry as people’s propensity to switch airports is limited. Only 20% of passengers are prepared to add an extra hour to their travel if they are on a short-haul European flight. Easyjet’s real competitors are those who fly the same routes from busy airports - mainly British Airways and Air France but certainly not Ryanair. British Airways and Air France are not strong competitors to Easyjet because they have structurally higher costs due to pension schemes, staffing costs and culture. This creates an environment in which Easyjet will keep expanding, gradually taking the flag-carriers business.

Channon estimates that three-quarters of Easyjet’s business is protected by a slot-constrained moat. This provides pricing power and high returns.

The opportunity for Phoenix to invest in Easyjet came about because of Brexit. Channon said he thought Brexit was a non-event for Easyjet. It does not change the competitive landscape and Easyjet will get a European license. Phoenix bought their Easyjet stock 9 months ago. Channon said he would not buy today but would wait for the price to fall below £10 per share (the stock is trading at around £13.80).


Be sure to check out the rest of the presentations from the London Value Investor Conference.