Gamble of the week: lesser-known budget airline
By
Paul Hill Nov 13, 2009
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Following British Airways' awful first-half results last Friday, there's little doubt that the aviation industry – set to lose $11bn globally this year – has split into two distinct camps.
On one side are the loss-making national flag-carriers, who are being strangled by high costs and crippling pension deficits. On the other sit the more profitable 'no frills' operators, such as Ryanair and Easyjet, who continue to attract price-conscious travellers.
Another, lesser known, budget carrier is Jet2. It is owned by Dart, and operates out of regional airports such as Leeds/Bradford, Newcastle, Manchester and East Midlands. It runs a fleet of 29 Boeing planes, offering low-cost scheduled, charter and cargo flights to a variety of European city, sun and ski destinations.
For the year ending March 2009, Jet2 delivered operating profits of £31m on sales of £326m. This was a creditable result, given oil touched $145 per barrel in mid-2008. It was achieved by the firm skillfully hedging its fuel requirements, and micro-managing overheads.
Seat capacity was cut by 49% last winter, which improved the airline's load carrying capacity to 78% from 72%. Furthermore, Dart has learned from its peers that good money can be made from charging for onboard services, baggage check-in and pre-booked seats – ancillary sales jumped by 64% to £14.93 per person in 2008.
Dart Group (Aim: DTG)
Dart also owns a British logistics firm (with revenues of £113m), Fowler Welch-Coolchain. It supplies around 1.25 million cases of prepared meats, ready meals, fruit juices and pasta each week to supermarkets and other retailers. Although this isn't a high-growth business, it is nonetheless a steady income generator, and should be able to achieve reliable operating margins of 4%.
The City is forecasting group revenues and underlying earnings per share of £450m and 9.2p respectively for this year. That puts the shares on a p/e ratio of only 5.7. This seems far too low, especially given the net cash of £11.8m available back in March.
So what should investors watch out for? The main risks are higher fuel costs, although these are fully hedged until April 2010, a weaker pound and increased departure taxes. Jet2's cargo business may also have suffered from lower volumes owing to the recent Royal Mail strikes.
Meanwhile, cash flows would be badly affected if households choose to delay booking their summer holidays. But after an awful British summer, I suspect more British holiday-makers will want a bit of guaranteed sun next year. Overall, Dart rates as a buy for the more adventurous investor. First half 2009 interim figures are due out on 19 November.
Recommendation: SPECULATIVE BUY at 53p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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