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Jet2.com: strong FY2013 profit growth hides major challenges

23-Jul-2013

Jet2.com is a two-sided coin. Profitable every year since FY2008, the LCC’s FY2013 operating margin puts it in the top half dozen European airlines. In 2013 its operating profit grew by 23%, helping to drive parent Dart Group to a 33% increase in its operating result. The group, and the airline, appears to be well managed and well capitalised. Jet2.com serves leisure markets from bases in the northern parts of the UK and its top 10 routes include seven where it is the leading carrier.

However, Jet2.com also faces significant challenges. It faces competition from lower-cost LCCs in many of its markets and, although its network concentrates on slightly further flung destinations, the likes of easyJet and Ryanair are also moving into longer sectors.

Jet2.com’s capacity is more seasonal than any other leading carrier in the UK, bringing significant challenges to achieving year-round profitability. Its policy of acquiring second hand aircraft minimises capital expenditure, but gives it an ageing fleet with a structural operating cost disadvantage.

37% increase in Dart Group net profit in FY2013; strong balance sheet

On 18-Jul-2013, Dart Group reported a 37% increase in net profit to GBP31 million for the year ended 31-Mar-2013. Revenues grew by 27% to reach GBP869 million and operating profit was up 33% to GBP38 million, although the operating margin was only 0.2 ppts better, at 4.4%.

The group’s balance sheet continues to be very conservative, with a year end net cash position (i.e. cash balance greater than gross debt) of GBP212 million. Its year end gross cash balance of GBP221 million is equivalent to just over three months of revenues. Included within cash and money market deposits is GBP100 million of restricted cash, but the group still has a net cash position even after netting this out.

The group saw a 13% increase in airline passenger numbers and a 93% increase in package holidays sold.

Dart Group PLC financial highlights: FY2013

Year to March, GBP million except where stated 2012 2013 Change
Revenue 683.0 869.2 27.30%
Operating profit 28.5 37.9 33.00%
Operating margin % 4.2 4.4 +0.2 ppts
Net profit 22.7 31.2 37.4%
Gross debt 9.3 8.5 -8.6%
Cash & money market deposits 152.0 220.9 45.3%
Net debt/ (cash) -142.7 -212.4 48.8%
Equity 158.9 186.6 17.4%
Airline passengers (million) 4.27 4.84 13.3%
Airline passenger load factor % 87 90 +3 ppts
Package holiday customers (000) 216 417 93.1%

Dart Group has a strong track record of profitability with the airline at the fore

Dart Group has seen revenues and profits grow every year since FY2010 and it has been profitable for at least 10 years. Unlike many groups that contain an airline and other businesses, the group’s airline is Dart Group’s most profitable business. The airline, Jet2.com, is the main subject of this report.

Dart Group PLC revenues, operating profit and net profit (GBP million): FY2008 to FY2013

Dart Group PLC operating profit by segment (GBP million): FY2008 to FY2013

Jet2.com revenues were up 21% in FY2013 and the airline has been profitable since 2008

In FY2013, the Jet2.com saw revenue growth of 21% and accounted for almost two thirds of group revenue. The package holidays business, Jet2holidays, more than doubled its revenues and overtook the distribution and logistics business Fowler Welch to become the group’s second business segment by revenues (and by operating profit).

Dart Group revenues by segment: FY2012 and FY2013

Year to March, GBP million 2012 2013 Change % of 2013 total
Distribution & logistics 152.4 155.2 1.80% 17.9%
Leisure airline 461.3 556.2 20.60% 64.0%
Package holidays 114.5 244.8 113.80% 28.2%
Group eliminations -45.2 -87.0 92.50% -10.0%
Group total 683.0 869.2 27.30% 100.0%

Jet2.com has been consistently profitable since it recorded a breakeven result in FY2008. However, although its revenues have grown significantly since FY2009, operating profit was lower in FY2013 than in FY2009 and its operating margin halved from 9.5% to 4.8% over this period. Nevertheless, its FY2013 result still places it among the top half dozen European airlines by operating margin.

Jet2.com revenues, operating profit (GBP million, left hand axis) and operating margin %, right hand axis): FY2008 to FY2013

Strong passenger growth since FY2010

In FY2013, Jet2.com grew passenger numbers by 13% to 4.8 million, compared with a 10% increase in scheduled seat capacity, with load factor up by 3ppts to an impressive 90%. This load factor improvement was in part underpinned by the sale of seats to Jet2holidays, which represented 17% (2012: 10%) of total scheduled flying.

Jet2.com’s passenger numbers have grown every year since FY2010 and were 56% higher than their FY2010 level in FY2013. Load factor gained 18 ppts from FY2008 to FY2013, with particularly strong gains in both FY2009 and FY2010, when passenger numbers fell.

Jet2.com passenger numbers (left hand axis, million) and passenger load factor (right hand axis, %): FY2008 to FY2013

Growth in per passenger ticket and retail revenues

In FY2013, Jet2.com achieved an increase of 16% in ticket revenue per passenger, to GBP59.67, and an 11% increase in retail revenue per passenger, to GBP30.96. Increased ticket revenue reflected a higher proportion of “far sun” destinations and improved revenue management. Growth in retail revenue per passenger came from a number of areas, including baggage charges, advance seat assignment, extra leg room seats, in-flight sales and commissions on car hire and travel insurance.

Jet2.com passenger ticket revenue per passenger and retail revenue per passenger (GBP): FY2008 to FY2013

Jet2.com has eight UK bases; market share mixed

Jet2.com operates from eight UK bases in the north of England, Scotland and Northern Ireland. These are Leeds Bradford, Manchester, Newcastle, Belfast International, Blackpool, Edinburgh, East Midlands and Glasgow.

Jet2.com top 10 bases by seats: 15-Jul-2013 to 21-Jul-2013

Jet2.com’s share of seats at its UK bases is mixed. At Manchester, Jet2.com’s biggest base by seat capacity, it is number three with 12% of seats, behind Ryanair and Monarch. At its second biggest base, Leeds Bradford, it is the leading carrier with a share of 47%, ahead of Ryanair and Monarch. At Newcastle, it is number one with 29%, ahead of easyJet on 24% and British Airways on 12%.

It is number four at Glasgow (12% of seats), number two at East Midlands (17%), number six at Edinburgh (4%), number two at Belfast International (9%) and number one at its smallest base Blackpool (93%). In every base, it faces significant competition from other leading LCCs.

Unlike many other European LCCs, Jet2.com has not established bases outside the UK. This is reflected in relatively weak shares of seat capacity at its biggest non-UK airports. At Palma de Mallorca, it is the eighth biggest carrier, with a share of less than 4%, and at Alicante it is number four, with 7%. At Malaga it ranks eight, with 4% of seats, and it is fourth at Faro, with just under 8%. It has been reported that it plans to base one 737-800 at Lanzarote, where it is number six with 5%.

Manchester Airport seat capacity by carrier: 22-Jul-2013 to 28-Jul-2013

Leeds Bradford Airport seat capacity by carrier: 22-Jul-2013 to 28-Jul-2013

Jet2.com’s capacity is focused on leisure destinations

Jet2.com route map

Jet2.com operates a single economy class cabin and, according to Innovata, more than 99% of Jet2.com’s seat capacity is international (week of 15-Jul-2013).

Almost four fifths of this seat capacity is to Western Europe and one fifth to Eastern/Central Europe. It also has one destination in the Middle East and offers a limited pre-Christmas schedule to New York, but is otherwise a short/medium-haul operator.

Jet2.com international seat capacity by region: 15-Jul-2013 to 21-Jul-2013

More than 56% of its seat capacity is to Spain, with Portugal, Italy, Turkey, France and Greece being its next most important destination countries (source: Innovata, week of 15-Jul-2013). These destinations reflect Jet2.com’s focus on leisure markets.

Jet2.com international seat capacity by country: 15-Jul-2013 to 21-Jul-2013

Some strong positions on Jet2'.coms top 10 routes, but competition is plentiful

Spanish destinations (including Spanish Islands) feature in all of Jet2.com’s top six destinations by seat capacity and in nine of its top 10. It has market leading positions (by seat capacity) on seven of these routes, but it has no monopolies. It faces competition from Europe’s leading LCC Ryanair on seven of its top 10 routes and from Europe’s number two LCC easyJet on five. Monarch Airlines, with whom it shares a similar network profile of leisure routes, competes on five of these routes.

Jet2.com top 10 international routes by seats: 15-Jul-2013 to 21-Jul-2013

Jet2.com’s market position on its top 10 international routes by seats: 15-Jul-2013 to 21-Jul-2013

Route

 Jet2.com rank
by seat capacity

Competitors

Leeds Bradford-Alicante

1

1 Jet2.com, 2 Ryanair

Leeds Bradford-Palma de Mallorca

1

1 Jet2.com, 2 Ryanair, 3 Monarch

Leeds Bradford-Malaga

1

1 Jet2.com, 2 Ryanair

Manchester-Alicante

2

1 Monarch, 2 Jet2.com, 3 Ryanair, 4 easyJet

Manchester-Palma de Mallorca

3

1 Monarch, 2 Ryanair, 3 Jet2.com, 4 easyJet, 5 Jetairfly

Newcastle-Palma de Mallorca

1

1 Jet2.com, 2 easyJet

Manchester-Faro

3

1 Monarch, 2 Ryanair, 3 Jet2.com

Glasgow-Palma de Mallorca

1

1 Jet2.com, 2 easyJet, 3 Jetairfly

Newcastle-Alicante

1

1 Jet2.com, 2 easyJet

Manchester-Ibiza

1

1 Jet2.com, 2 Monarch, 3 Ryanair

Leisure focus leads to a very seasonal capacity profile

Jet2.com’s focus on leisure routes gives it the most seasonal capacity profile of any leading carrier operating in the UK.

In Jul-2013, it is the sixth biggest carrier by seats in the UK market, while it is number nine based on Dec-2013 schedules (source: Innovata). Its Dec-2013 seat capacity will be just half that of its Jul-2013 capacity, a far greater seasonal reduction than for any other carrier in the UK top 10.

Ranking of airlines by seat capacity in the UK: Jul-2013 and Dec-2013

Airline

Rank
Jul-2013

Rank
Dec-2013

Dec capacity as
% of Jul capacity

British Airways

1

1

94%

easyJet

2

2

69%

Ryanair*

3

3

63%

Flybe

4

4

94%

Monarch Airlines

5

5

83%

 Jet2.com

6

9

50%

Virgin Atlantic Airways

7

6

91%

Aer Lingus*

8

7

94%

Lufthansa*

9

8

102%

Emirates*

10

10

100%

A ageing fleet includes Quick Time 737s, allowing mail diversity

According to the CAPA Fleet Database, Jet2.com has a fleet of 50 aircraft, versus 46 reported by Dart Group as at the end of Mar-2013. It acquired seven aircraft during FY2013, including two Boeing 737-800s, two 757-200s and three 737-300s. The majority of its aircraft are owned (94% according to the CAPA Fleet Databse). Its seat capacity in summer 2013 is 13% higher than last year.

The fleet includes three Quick Change variant Boeing 737-300s, which are used for the company’s Royal Mail night-time flights on 18 daily frequencies. These can be converted quickly from passenger configuration to freight configuration.

Jet2.com Fleet Summary: as at 22-Jul-2013

Aircraft

In Service

Airbus A320-200

1

Boeing 737-300

20

Boeing 737-300QC

9

Boeing 737-800

9

Boeing 757-200

8

Boeing 757-200(ETOPS)

3

Total:

50

The carrier’s Boeing fleet is ageing, with an average 737 age of almost 22 years and an average 757 age of close to 24 years. Its strategy of acquiring used aircraft is in contrast with that of leading LCCs such as Ryanair and easyJet, which operate a young fleet of aircraft bought new from the manufacturers. It can be argued that Jet2.com’s approach is more prudent and less risky to its balance sheet as it minimises capex outlays. On the other hand, its operating costs are likely to be higher due to the less efficient fuel burn and higher maintenance requirements of its older fleet.

Dart Group’s accounts do not split operating cost categories by business segment, but, even if its total fleet costs (costs of acquisition, maintenance and operation) are similar to those of other LCCs on a per seat basis, Jet2.com’s approach may need to be reconsidered in the light of new generation engine technology entering the market with the 737MAX and the A320Neo. This will bring further operating cost advantages to operators of the new generation equipment. Jet2.com’s disadvantage, if it were to seek to buy new aircraft, is that it would be unlikely to order the quantities necessary to secure significant discounts from list prices.

Jet2.com average fleet age: as at 22-Jul-2013

Jet2.com development of owned and leased aircraft numbers: FY2008 to FY2013

Jet2.com’s revenue per passenger growth has outpaced cost per passenger

Dart Group does not report sufficient data to allow analysis of CASK and RASK for Jet2.com, but it is possible to look at the development of total revenue per passenger and cost per passenger for the airline. Jet2.com operates cargo flights for the Royal Mail and these contribute both costs and revenues that are not linked to passengers. Nevertheless, cargo flights account for only around 10% of Jet2.com’s frequencies (week of 15-Jul-2013, source: Innovata) and it seems likely that they account for less than 10% of its costs (since mail flights are domestic and, therefore, shorter than Jet2.com’s average and since cargo handling costs are lower than passenger handling costs).

Thus it seems reasonable to analyse total costs and revenues on a per passenger basis.

Jet2.com’s costs per passenger grew by 42% from FY2008 to FY2013, with increases in every year. Fortunately, its revenue per passenger grew by 49% over this period, but the trend was less consistent as there were two years (FY2010 and FY2012) when revenue per passenger fell slightly. In FY2013, cost per passenger grew by 13% and revenue per passenger grew by 14%. It seems likely that this reflected longer average sector lengths, since fuel costs were not a driver (Dart Group reported that Jet2.com’s fuel cost per passenger improved by 3%), and pricing power helped by capacity cuts by legacy carriers in Europe.

Jet2.com index of revenue per passenger and cost per passenger: FY2008 to FY2013 (both indexed to FY2008 = 100)

Reduction in Royal Mail business to erode margins

Jet2.com will lose two, and retain six, of its eight Royal Mail routes when its current contracts terminate in 2014. As noted above, it is likely that dedicated cargo flights account for less than 10% of the airline’s costs. The company does not report the level of revenues it earns from these flights, but an estimate of its passenger revenues can be calculated from figures reported for ticket revenue per passenger and retail revenue per passenger and passenger numbers. The balance of revenues reported for the airline in total presumably mainly comes from cargo and accounted for 21% of airline revenues in FY2013.

This analysis suggests that the Royal Mail business contributes significantly more to Jet2.com’s revenues than it does to its costs and so the loss of part of this business may erode its margins.

Jet2.com is among the higher-cost LCCs

The chart below shows costs per passenger versus average sector length for a number of European legacy and low-cost carriers. Jet2.com’s position on this chart (using its total costs at the operating profit level as reported by Dart Group and average sector length derived from CAA data for 2012) confirms that it appears fair to designate it a low-cost carrier.

However, it is among the higher-cost LCCs, even after recognising that its average sector length is longer than most other LCCs.

The reasonable level of profitability that it achieves owes much to a relatively high level of revenue per passenger, part of which is contributed by Royal Mail flights, as noted above. As its Royal Mail business declines from 2014 and, as seems likely, competition from lower-cost LCCs grows, the challenge will be to reduce its cost base in order to remain profitable.

Cost per passenger (EUR) and average sector length for selected European legacy and low-cost carriers: 2012*


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