Last week at a General Meeting, Easyjet shareholders passed a motion approving the proposal to buy 35 current generation Airbus A320s and 100 New Generation A320Neos (for delivery 2017-2022). European airline growth, in terms of passenger kilometres performed (PKP),  is  forecast by ICAO to be 4.4% this year, 5.5% in 2014, and 6.2% (in each year this is slightly below global rates). Yet very significant reductions in capacity are occurring across the fleets of many European airlines – mainly full cost, but also including some low cost carriers. The airline world is polarising into winners and losers.  

Airline capacity changes Summer 2013 vs Summer 2012

                    %

Adria      -7.1

Air Baltic      -3.4

Air Berlin      -4.0

Air Europa      -2.4

Air France      -8.7

Air One          -14.7

Brussels Airlines-2.0

Croatia Airlines    -10.6

Estonian Air    -43.4

Flybe      -2.2

Iberia    -15.9

KLM      -4.0

LOT      -2.6

NIKI          -18.9

Olympic    -37.7

TAP      -0.2

Source: Morgan Stanley 

So with the likelihood of robust demand, and competitors weakening, it makes perfect sense for Easyjet, if it is confident in its business model (which I am sure it is), to add capacity. Obviously the fleet orders recently announced, and voted on last week, will not produce instant capacity uplift. However with current load factors around the 90% mark, the airline cannot grow significantly without adding to its fleet. Equally obviously –  even to Stelios – some of these airframes will be replacements for existing aircraft in the fleet (85 of the 135 in fact). And he will be well aware that each generation of aircraft brings significant operating benefits against those it replaces. Easyjet is forecasting a 4-5% operating cost saving in this fleet transition, together with a further 7-8% obtained by increasing the seating density (bad news for passengers!). The airline has been increasing its fleet over the last 5 years by 10-15 aircraft p.a. This deal will therefore add 50 new airframes over the 5 year delivery period, and is necessary just to sustain recent levels of capacity growth.

I am a happy holder of Easyjet shares. Their performance over recent months has been very pleasing. Earnings per share growth in the last few years has been c 20%, although this year is forecast to be nearer 50%, giving a forward PE of  15.2x, which does not look expensive to me.