Icelandic airline swoops on easyJet

Reykjavik-based carrier describes 8.4 per cent stake in low-cost operator as a 'long-term investment'

The Airline Icelandair last night disclosed that it had bought an 8.4 per cent stake in easyJet, fuelling speculation that the budget airline may fall victim to a takeover bid.

The Airline Icelandair last night disclosed that it had bought an 8.4 per cent stake in easyJet, fuelling speculation that the budget airline may fall victim to a takeover bid.

After a day of fevered speculation and massive trading in easyJet's stock, the Icelandic flag-carrier confirmed that it had snapped up 33.5 million shares through its UK broker Teather & Greenwood.

Icelandair described the £50m share purchase as a "long-term trade investment to which it may add in the short-term". Hannes Smarason, the chairman of the airline, added: "Part of the company's investment policy includes making investments in sectors where the group has specialised knowledge. The Icelandair group is financially strong and the company is seeking ways to improve the return on its cash. We have therefore kept our eyes open for opportunities in airline-related securities. We have a positive opinion of easyJet's business model and we think that the company has a bright future."

Analysts questioned whether it had the scale to match its ambition should it decide to mount a bid for easyJet. The low-cost carrier is five times bigger in turnover terms than Icelandair and three and a half times its market capitalisation. In terms of passenger numbers, easyJet flies twice the entire 290,000 population of Iceland each week.

Easyjet shares closed 14 per cent higher last night at 152p, valuing the airline at £607m. During the course of the day about 20 per cent of the company changed hands as dealers speculated on a bid approach.

Ryanair, Europe's biggest low-cost airline, had also been linked with the bid speculation but a spokesman said earlier in the day that "hell will freeze over first" before it bought its rival.

Mr Smarason telephoned easyJet's chief executive, Ray Webster, late yesterday afternoon, just prior to making the announcement of its share purchase, to reiterate that Icelandair was a "long-term investor". However, he gave no indication of what it intended to do with its stake.

Easyjet, which has issued two profits warnings this year, has been the subject of takeover rumours for several months. The initial speculation was that the airline's founder Stelios Haji-Ioannou, whose family still owns a 41 per cent stake in easyJet, was considering a bid to take the business private once again. However, Stelios ruled out making an offer two months ago and repeated his position earlier this week.

Icelandair is part of an investment group which has a turnover of £315m and which also owns charter and cargo marketing interests, a hotel group, a car rental business and travel agencies. Although the airline is the largest in Iceland, it is tiny. Last year Icelandair made a profit of less than £5m on turnover of £204m.

Easyjet shares hit an all-time low last month on concerns about rising fuel costs and the company's repeated warnings that fares will remain under pressure this year because of overcapacity in the airline industry. The airline has also cut back on its capacity growth for next year by one-third, saying that its fleet will grow by about 16 per cent rather than the 24 per cent originally planned.

It has reassured the market that profits for the year just ended will be at least £60m compared with the £52m achieved in the previous 12 months.

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