12-Sep-2020 1:11 PM

Jet2.com: low cost airline plans summer 2021 capacity near 2019 levels

Analysis

Dart Group plc, owner of the UK low cost airline Jet2.com, is renaming itself 'Jet2 plc'. It sold its distribution/logistics division earlier this year to focus on leisure travel, which accounted for 95% of revenue last year. Jet2.com stands out from other European LCCs in that more than half of its passengers come via the in-house package holiday company, Jet2holidays.

Jet2.com grounded its entire fleet for longer than most competitors at the onset of the COVID-19 crisis, only resuming operations in mid Jul-2020.

Its capacity build-up was then a little slower than the European market in Aug-2020 and certainly more cautious than that of other LCCs, probably helping to support load factors. However, its seat count as a percentage of last year's is set to move ahead of the market in Sep-2020.

Jet2.com's winter 2020/2021 bookings are soft, but better for the much more important summer 2021, when it is planning capacity close to 2019 levels.

This contrasts with a broad consensus that world aviation will not return to 2019 levels before 2023 or 2024. Jet2.com is trusting UK consumers' appetite for summer sun, sand and sea.

Summary

Jet2.com has returned 43 out of 92 aircraft to service, 47% of the total, after total grounding in Mar to Jun. It is in tier two of European LCCs.
Jet2.com operated 41% of 2019 seat capacity in Aug-2020 (slightly below the market) and plans 51% in Sep-2020 (above the market).
Forward bookings are weak for winter 2020/2021, but better for the more important summer 2021 when Jet2.com is planning capacity close to 2019 levels.
Cash advances from customers, although significant, are falling. However, Dart Group ranks in the top half of European airline groups for liquidity.

Jet2.com has returned 43 out of 92 aircraft to service

According to the CAPA Fleet Database, Jet2.com had a total fleet of 95 aircraft before the crisis, of which 87 were in service at 29-Feb-2020. The seasonal nature of its business, which is very summer-focused, means that it would be normal for some of its fleet to be inactive in the winter period.

However, the onset of the COVID-19 pandemic led to a total grounding of its fleet from mid Mar-2020 through to mid Jul-2020.

Jet2.com resumed operations on 15-Jul-2020 and had 39 aircraft back in service as at 31-Jul-2020.

It had returned 43 aircraft, or 47% of its slightly reduced total of 92 aircraft, into service at the end of Aug-2020. These figures have remained the same as of 7-Sep-2020.

Jet2.com: number of aircraft in service and inactive at month end, Jan-2020 to Aug-2020

Jet2.com's fleet ranks with the second tier of European LCCs

Jet2.com's total fleet of more than 90 aircraft has grown almost threefold over the past decade.

Although its fleet is still considerably smaller than those of Europe's two LCC giants, Ryanair and easyJet, it is in the same ballpark as Wizz Air and Norwegian and the LCC fleets of the big three legacy airline groups in Europe (see chart below).

European LCC narrowbody fleets, 19-Aug-2020

Jet2.com operated 41% of 2019 seat capacity in Aug-2020…

In terms of capacity, Jet2.com deployed 41% of its 2019 seat numbers in Aug-2020, according to data from OAG and CAPA.

This is consistent with a comment in Dart Group's AGM statement on 3-Sep-2020 that the airline flew to approximately 40% of its destinations in Aug-2020.

The group noted that there had been "setbacks, such as the imposition of quarantines and evolving guidance from the UK Government", a code for the highly unpredictable and changing level of restrictions on travel between the UK and key European holiday destinations.

Nevertheless, it professed itself "satisfied" with average load factors and the financial contribution achieved to date. It is planning to add further capacity this summer, supported by its "quick to market, flexible operating model".

…and plans 51% in Sep-2020

Jet2.com's projected capacity for Sep-2020, derived from schedules filed by the airline with OAG, is for an increase to 51% of 2019 levels.

These figures show that Jet2.com was a little slower than the overall European market in building up capacity in Aug-2020, but is currently set to move ahead of the market in Sep-2020.

Seat numbers for all routes to/from/within Europe reached 45% of 2019 levels in Aug-2020, but are currently projected to slip back to 43% in Sep-2020.

On routes within Europe, which is where Jet2.com's network focuses, the total market was at 54% of 2019 levels in Aug-2020 and is projected to fall to 49% in Sep-2020.

The intra-Europe LCC segment grew much more quickly in Aug-2020, reaching 61% of last year's seat numbers, but is set to fall back to 52% in Sep-2020, very close to Jet2.com's 51%.

Jet2.com vs Europe: percentage of 2019 seat capacity in Aug-2020 and projected* for Sep-2020

Winter 2020/2021 forward bookings are weak

Looking into the winter 2020/2021 season, Dart Group said that forward bookings had yet to match its seat capacity. Part of the problem in this respect is that customers are booking with shorter lead times than in the past - a challenge faced by all airlines currently.

Schedules filed with OAG, together with seat configuration data from CAPA, indicate that Jet2.com is currently planning capacity at, or slightly above, prior year levels in the coming winter.

Even taking account of the fact that the winter has much less capacity for Jet2.com than the summer, the capacity outlook for the coming winter may well be trimmed - particularly given current low forward bookings.

In the meantime, Jet2.com plans to price its airline seats and the package holidays sold by Jet2holidays this winter at levels that are "consistently enticing".

The summer season is much more important to Jet2.com

Of much greater importance to Jet2.com is the summer season of next year.

The first six months of its financial year (i.e. April to September) typically account for approximately 70% of its passenger numbers and 75% of its revenue (and these figures are higher when applied to the whole summer season, which lasts more than six months).

Clearly, it will not achieve anywhere near typical levels of summer revenue this year, but Jet2.com appears optimistic about next summer.

Jet2.com plans summer 2021 capacity close to 2019 levels

In summer 2021 Jet2.com plans to fly to all of its destinations at close to summer 2019 capacity levels. With many in the industry forecasting that 2019 demand will not return before 2023 to 2024, this is a sign of Jet2.com's confidence in the outlook.

Although next summer is still a long way off, Jet2.com's current bookings are "encouraging", and it says that average load factors are ahead of the same point last year. It does not enumerate any of this.

Package holiday customers are a growing proportion of Jet2.com passengers

In addition, package holiday customers are showing a "material increase" as a proportion of total bookings. Again, no numbers are provided, but this continues a trend of growing importance to Jet2.com: in-house package holiday customers.

They accounted for 52% of the airline's passenger numbers in the year to Mar-2020, the first time this share has exceeded 50% and a 48ppt increase on a decade earlier.

Jet2.com: proportion of passengers travelling on package holidays with Jet2holidays.com, FY2008 to FY2020

Cash advances from customers, although significant, are falling

Jet2.com's package holiday customers tend to be a loyal market segment and one that likes to book in advance.

The group typically ends the financial year in March with approximately half of the following financial year's sales already achieved. This gives a significant boost to its cash balances.

The AGM statement noted that Dart Group's cash balance was GBP1,064 million as at 28-Aug-2020, of which GBP435 million was customer deposits on future travel and holidays. This was down from the GBP867 million reported at the end of Mar-2020.

It is usual for this figure to fall during the summer as the majority of bookings are fulfilled and advance bookings for the quieter winter season to come are lower.

Nevertheless, this Aug-2020 figure for customer deposits was more than GBP200 below the GBP643 million reported at the end of Sep-2019 (the nearest date to a year previously).

This indicates that Dart Group's ability to rely on forward bookings as a significant source of cash is coming under strain.

But Dart Group ranks in the top half of European airline groups for liquidity

Even so, Jet2.com's parent company is comparatively well positioned in terms of liquidity versus other European airline groups. Its GBP1,064 million of cash at 28-Aug-2020 is equivalent to 30%, or 108 days, of last year's revenue.

In addition, it has access to GBP300 million of undrawn credit from the UK's Covid Corporate Financing Facility.

This brings it to a total available liquidity of GBP1,364 million, which is 38%, or 139 days of last year's revenue. This puts Dart Group comfortably in the upper half of European listed airline groups on this measure (see chart below).

European airline groups: available liquidity as a percentage of 2019 revenue*

Jet2.com is among the better placed European airlines to weather the crisis

As with the rest of the airline industry, the near to medium term future for Jet2.com will depend on the progress of the fight against the coronavirus, the evolution of biosecurity, and the further loosening of travel restrictions.

Nobody can accurately predict these things, but there is a growing consensus that the recovery in aviation will continue to be led by leisure travel more than by business travel; by short/medium haul rather than long haul, and by operators that can deliver a simple product at an attractive price.

As a leisure focused, short/medium haul low cost airline, Jet2.com should be among those that not only survive, but it could also grow its share of European air travel once the virus recedes.

In the meantime, it at least has a relatively good liquidity balance to cushion it from inevitable demand volatility.