Budget airline Easyjet is navigating economic turbulence by keeping costs under control, and that philosophy extends to its employee benefits, says Tom Washington.
It is hard to miss budget airlines. Their bargain-basement prices and in-your-face marketing campaigns have not only made the likes of Easyjet and Ryanair household names, but have also sparked a trend for weekend breaks in European destinations that were previously unaffordable for many people. But although low-cost air travel has revolutionised the holiday industry, no-frills carriers such as Easyjet have not had an easy time of late.
The past year has seen crude oil prices rise to unprecedented levels and consumer spending fall in the economic downturn. Such challenges have seen some of Easyjet Airline Company’s competitors struggle to survive and, in the case of low-cost airline Zoom, go into administration. Ryanair, Easyjet’s Dublin-based rival, blamed escalating fuel costs when it reported losses of @101.5m (approx £89.7m) and an annual revenue growth of just 6% to €604.5m (£504.3m) in the three months to December 2008.
In its first-quarter interim report for the three months ending 31 December 2008, published in January, Easyjet reported a £31.5m (32%) increase in revenue on the same period in 2007, along with a 10.1% increase in passenger numbers. Despite reporting underlying pre-tax profits of £123m last year (down 45% on 2007); strong revenue growth of 31% for the year ended 30 September 2008, enabled Easyjet to offset more than half of the impact of higher fuel costs.
Ken Lawrie, head of reward at Easyjet, says: “The first-quarter results were well received in the City and we are ahead of where we thought we would be. The issue for us is that most of our profitability is in the summer, so while we are ahead at the moment, there is always nervousness in this environment. A good or bad summer could make or break the year.”
As a result, the airline is treading carefully. It is expecting only single-figure growth for 2009, despite experiencing rapid annual growth of typically between 15% and 20% in most years since it was founded in 1995 by entrepreneur Stelios Haji-Ioannou.
With its bright orange branding and penny-priced flights, Easyjet was thrust into the public’s gaze when it was first featured in the television series Airline in 1999. A no-frills, low-cost approach became synonymous with the Easyjet brand, as did its bright orange colour scheme.
Although the airline has a 5,000-strong UK workforce, many of its services, such as baggage handling and engineering, are outsourced to contractors. Lawrie says this is typical of Easyjet’s approach. “If we think someone can do something better or cheaper than us, it makes sense to outsource.”
This focus on cost will be emphasised further in the coming year during a tricky time for the industry, says Lawrie. “Last year was difficult and unfortunately we had some redundancies at head office in September. This year we are particularly looking at staffing costs and making sure we have got just the right amount of people, not too many, by looking at seasonal contracts [to cover the busiest periods, such as summer]. In the past, because we have been growing so quickly, we have been able to keep staff on over winter with a view to becoming even bigger.”
Easyjet’s reputation as a simple, economic operation resonates clearly through both its business and employee benefits strategy. “Our philosophy on benefits is that we are a low-cost, no-frills airline and therefore do not want to introduce legacy-type benefits or things that have a defined-benefit nature,” says Lawrie.
But this does not mean Easyjet shies away from benefits altogether, or simply looks for the easiest options. This is demonstrated by its all-employee share schemes, which are available to staff internationally. In the UK, it launched a sharesave scheme and share incentive plan (Sip) in 2005.
In the sharesave scheme, employees who signed up to the first year of the plan were given the opportunity to buy shares at £1.86 with a maximum 20% discount when the scheme matured in August last year. About 40% of Easyjet’s staff – 880 individuals – joined the scheme and each gained an average of more than £3,000.
Within its Sip, Easyjet offers what it calls a buy-as-you-earn scheme, through which staff are offered the chance to buy partnership shares on a matching basis. Because shares are bought from their gross income, UK workers benefit from tax and national insurance (NI) savings. “In other [countries’] jurisdictions, it is just a one-for-one match because we obviously cannot extend the same tax breaks,” says Lawrie. “Other than that, it’s the same benefit.”
Easyjet has also granted free shares worth up to two weeks’ salary to all its employees internationally in recent years, helping to push take-up of the Sip to about 85%.
“We have always been keen to share in our success and to give people a stake in the company, and that was the request from the board in the early design stages,” says Lawrie. “So we wanted to include all employees, including international staff.”
The company also listens to its employees’ views. In response to feedback from staff, the airline launched voluntary benefits for its UK workforce last December. The scheme, which went live in February, allows workers to buy perks on an annual basis via salary sacrifice, so saving on tax and NI contributions.
Staff can access the scheme – called Your Benefits – through a company-branded online portal. The benefits available include childcare vouchers, bikes for work, private medical insurance, eye care and dental cover. “Our business model is that we tend to separate where the costs are and pass them on to passengers, so the passengers who bring bags pay extra, while those who do not just pay a basic rate,” says Lawrie. “It is the same with benefits – those who want a particular benefit can pay for it. The intent was not to add any costs or complexity.”
The company also introduced provisions for staff to make additional contributions into its group personal pension (GPP) plan. So far, over 50% of employees have opted to do so. All Easyjet staff already receive employer pension contributions of between 5% and 7% depending on grade, and half of the employer’s NI savings are invested back into the individual’s pension pot.
Also, in tune with Easyjet’s overall philosophy, its entire voluntary benefits scheme is being financed through the NI savings it will make, and all its administration is outsourced to its provider, You at Work.
Timing proved a particular challenge when implementing the scheme, largely because of the 60 redundancies at the firm’s head office in September. Communication was therefore a delicate process, and the scheme’s launch was delayed by three months – from September to December. Extra effort was also made to ensure staff knew it was self-financing. “We were trying to avoid any criticism and so delayed the launch because our staff would have said ‘why are you doing this now when our colleagues have just been made redundant?’,” says Lawrie.
Keeping the lines of communication open is something Easyjet prides itself on and works hard to portray internally. “We have a single status structure,” says Lawrie. “The chief executive officer [CEO] gets exactly the same benefits as anyone else and sits in an open-plan area with everyone else. It is a very approachable environment and we think that the management style is conducive to effective working.”
Once again, Easyjet’s overall business strategy was clear to see at the launch of Your Benefits. Much of the scheme’s communication was done online, with pilots receiving personalised emails containing details of the perks on offer. All other employees received a brochure that was sent to their home address. “We wanted staff to have something they could read in their own time and were also keen for employees to share their benefits package with their families,” says Lawrie. “Informal is very much the watchword for internal communications.”
This informal approach stems from the fact that Easyjet has a relatively young workforce – three-quarters of its employees are under 40 years old and 40% are aged under 30 years. As part of its strategy, regular emails signed by the CEO were sent out to remind staff if they had not applied. A competition was also held, entering all staff who registered on the portal into a prize draw to win £500-worth of retail vouchers.
But ensuring staff fully appreciate the value of their benefits can be a challenge. The complex make-up of some employees’ remuneration package, such as industry-specific perks, made it hard for staff to see the perks’ true value, says Lawrie.
For example, cabin crews’ compensation packages comprise several elements rather than a standard base salary, with one-third of their monthly pay typically made up of extras such as flight allowances and commission payments. To improve clarity, online total reward statements were launched in tandem with the voluntary benefits scheme, outlining details of pay, pensions, crew allowances and bonuses.
Looking to the future, Lawrie says Easyjet hopes to implement international benefits because of the increased presence of its employees across Europe. “This year, for the first time, more than half our flights were purchased outside of the UK, so we would expect to see more and more staff outside of the UK,” he says. “We will be talking to our companies in other countries to see how we can roll the scheme out internationally.”
Whatever form this international package takes, the company’s ethos will doubtless be clearly visible throughout.
Easyjet Airline Company at a glance
Easyjet Airline Company was founded in 1995 by entrepreneur Stelios Haji-Ioannou, with just two planes flying from Luton to Edinburgh and Glasgow. It now flies 165 aircraft to locations in 27 countries in Europe and northern Africa. In its interim first-quarter results for the three months ending 31 December 2008, Easyjet carried 10.1 million passengers, up 10.1% on the same period in 2007, with a 20% growth in passengers originating in mainland Europe. More than half its passengers now originate outside the UK.
Easyjet employs a total of 6,100 staff, 5,000 of them based in the UK. Its workforce includes flight crew, administrative and management staff, but all other services are outsourced.
The company floated on the stock market in 2000, although founder Haji-Ioannou remains the majority shareholder with 37% of Easyjet’s shares.
For the year ending 30 September 2008, Easyjet Airline Company delivered underlying pre-tax profits of £123m, down 45% from the previous year’s £202m. The airline has previously enjoyed rapid annual growth of between 15% and 20%, but has announced plans to slow growth this year, because of the rising costs of fuel, by initiating aircraft sales and lowering aircraft utilisation rates for its winter 2008/2009 season.
Ken Lawrie, head of reward at Easyjet Airline Company, joined the firm in 2004 on a three-month freelance contract to advise it on executive pay. After making a number of recommendations, he was asked to stay and implement his ideas.
Prior to joining Easyjet, Lawrie spent eight years at Hay Group as a consultant -including two years as a general manager of information services in Singapore – before joining engineering firm Bektel as a regional compensation and benefits manager in 1997. He then moved to support services firm Amey in 2001 where he held the role of group remuneration manager for two-and-a-half years. Lawrie says his biggest career achievement was introducing Easyjet’s all-employee share plans. “I had not introduced an employee share plan before, so it was a big job. We launched three share schemes [and] they all achieved good take-up.”
Group personal pension (GPP) open to all staff, who receive employer pension contributions of between 5% and 7% depending on grade. Employees can make additional contributions through salary sacrifice, and half of the employer’s national insurance savings are invested back into the individual’s pension pot.
Sharesave and share incentive schemes offered to UK employees. Similar schemes are operated for staff internationally.
Private medical insurance, income protection, optical benefits and dental cover all available through voluntary benefits scheme.
Critical illness insurance
Easyjet pilots are entitled to “loss of licence” cover, akin to critical illness cover, through which the employer will pay out a lump some of 120% of salary to help with rehabilitation should a pilot lose their flying licence on grounds of ill health.
All employees receive 23 days’ holiday, rising to 25 after two years’ service. A complicated roster system means flight crews select their holidays on a points-based system, with more popular weeks costing more points than others.
Cabin crew receive incentives for flying and get commission for food and drinks sold on board. All staff also receive an annual bonus based on company and individual performance, with the opportunity to earn up to 40% of their annual salary. Pilots receive a loyalty bonus of 5% per annum after two years, 10% after five years and 15% after 10 years’ service.
Case study: Childcare vouchers valued
Cabin crew trainer Lisa King has worked for Easyjet for five years. The nature of her role means her time is spent either at the airline’s Luton training academy carrying out cabin crew and pilot ground training, or in the sky working with cabin crew.
Following the launch of Easyjet’s voluntary benefits scheme, King is impressed by the easy-to-use and clear website, as well as the simplicity of selecting benefits.
She particularly values the childcare vouchers offered through a salary sacrifice arrangement and cites this as the most important benefit to her. “My daughter is three years old now and I had been disappointed that this scheme was not in place earlier,” she says. “I pay a lot of money for childcare each month and I am therefore very pleased that my second largest expenditure can now be tax-efficient.”