The airline and package holiday firm has been a big winner from Thomas Cook’s demise
Thursday 27 Feb 2020 Author: Yoosof Farah

When it comes to beneficiaries from the collapse of Thomas Cook, they don’t come much more bigger than Jet2-owner Dart Group (DTG:AIM).

Dart’s share price has soared from 888p when Thomas Cook went bust in September 2019 to £15.82 today.

The shares were even higher, approaching £20, before concerns about the impact of the coronavirus outbreak on the travel sector started to escalate.

CAPITALISING ON THOMAS COOK COLLAPSE

In a trading update three weeks after its rival’s liquidation, Dart said it had experienced higher customer demand as a result, leading the firm to state its full year pre-tax profit would ‘significantly exceed’ market expectations.

Its half year results published a few weeks later – covering the six months to 30 September – also showed a strong business performing well. Revenue increased 16% to £2.6bn, while pre-tax profit moved 2% higher to £339.7m.

This was driven by an 8% increase in flight-only customers to 4.75m passengers and a 17% increase in package holiday customers to 2.71m.

WHAT DOES IT DO?

Jet2 is the second largest package holiday operator in the UK by market share, behind only TUI (TUI) which took 5m Brits on package holidays last year.

Unlike its debt-laden competitor, another reason Dart is so popular with investors is the fact it had £291m in net cash at the end of the year to 31 March. And given it operates online only, it doesn’t have to incur costs associated with an estate of physical stores.

Significant aircraft seat capacity had been lost in the market following the bankruptcy of Thomas Cook, which provided around 1.5m seats between April and September last year on short-haul flights to Europe from the nine UK bases where Jet2 operates. This compares with 5.4m Jet2 seats and 2m TUI seats. 

The remaining players subsequently increased their capacity. According to analysts at Canaccord Genuity, based on current flying programmes Jet2 and TUI will have a short-haul seat capacity this summer of around 6m (up 10%) and around 2.2m (up 13%), respectively, on routes from Jet2’s nine UK bases.

That means that only around 50% of Thomas Cook’s summer 2019 short-haul seat capacity is expected to be replaced with additional seats from Jet2 and TUI.

Spain remains the most important for Jet2, accounting for about half its seat total.

GETTING BUMS ON SEATS

What has also helped Jet2 is a lack of competition on some routes, with only 40% of Jet2’s seats on routes which directly overlap with its main rival TUI.

When added to the fact that Jet2 is better than all barring Ryanair (RYA) at filling seats on its planes, with its passenger load factor reaching its highest ever level at 92.8% in the year to 31 March 2019, it’s clear to see why the firm has been so good at taking advantage of its rival’s collapse.

In fact, Jet2’s passenger load factor has increased from 72% in 2008, before it started selling package holidays, to remain at more than 90% in every year since 2014.

By comparison, British Airways owner International Consolidated Airlines (IAG) on 9 January reported a load factor of 84.6% for 2019.

Though it’s worth pointing out budget airlines, because they offer cheaper flights, are better at filling seats on planes than ‘premium’ airlines like British Airways, KLM and Lufthansa.

RAZOR SHARP FOCUS ON TARGET MARKET

One of the main reasons Dart has been able to fill seats on its planes and grow as it has done is because it knows its target market so well.

Having realised in the early 2000s that there was a lack of cheap flights from the north of the UK to mainland Europe, the company launched Jet2 in February 2003, with its first flight going from Leeds Bradford Airport, where the company is currently headquartered, to Amsterdam.

Among its nine UK bases, only one – Stansted – is in London with the other eight in airports like Birmingham, Manchester, Newcastle, Leeds, Edinburgh and Glasgow.

Dart also tries to tap into what its customers are looking for. This was reflected in the recent launch of Vibe by Jet2holidays, which targets ‘millennial mindset’ holidaymakers who want to experience more than a typical 18-30s overseas holiday.

The ‘party vibe’ is still there if they want it, but holidaymakers can also choose a ‘pure vibe’, ‘chilled vibe’ or an ‘iconic vibe’, a package holiday which also offers gig tickets for A-list artists.

FORGOTTEN LOGISTICS ARM

It is very easy to forget Dart has a distribution and logistics business called Fowler Welch.

It’s a lot less sexy than selling sun-kissed holidays to Ibiza but the division, which does supply chain logistics for ambient and temperature-controlled produce, has also been chugging along nicely with a 23% increase in pre-tax profit in the half year to 30 September 2019.

However, its contribution to Dart’s overall business remains small. That 23% increase drove the division’s profit to £2.7m, compared to the £339.7m pre-tax profit made by the group overall. The division delivered half year revenue of £86.4m.

Fowler Welch may seem an odd fit for Dart given it’s very different to package holidays, but the group started out in the 1970s as an air services business flying flowers in contracted aircraft from Guernsey to mainland UK.

The travel sector faces substantial risks in the near-term from the coronavirus and this is beginning to be priced in by the market, on top of the usual pressures facing airlines including volatile fuel costs and currency movements.

Dart is very attractive as a business yet there are too many risks for the share price to think about buying now. This is one to watch and only buy once the coronavirus has been contained.

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