When I looked at Dart (LON:DTG) last year it was undervalued: it could have easily generated unencumbered cash sufficient to pay off its liabilities to its creditors and to cash out its shareholders at the value of its market capitalization. In other words, it was a pretty good cigar butt at least and maybe more – one didn’t have to think too much beyond that.

Since then, as everyone knows, the share price has almost quadrupled. A nice trade that I missed out on because I was thumb-sucking over the 10p that I’d have to pay for the airline (I valued Fowler Welch at ~60p and I wanted Jet2 for free).

At the current market cap, however, more scrutiny is required. Jet2 is a low cost airline. Or rather, Jet2 competes with low cost carriers. Now, in that particular market, what matters is unit cost: people will fly with you if you’re cheap and they won’t if you’re not.


Jet2's route map. 50% of its traffic is to Spain.

To date, competition has been muted: Ryanair and Easyjet have been busy frying other fish. So Jet2 has been filling its planes, earning profits on ancillaries, and funding its growth via 0% interest bearing loans from its customers in the form of deferred income. This has added up to a high ROIC.

But a high ROIC is not evidence of competitive advantage. Sometimes a high ROIC is built
into the nature of the sector (every advertising company and recruitment consultant has a high ROIC) and sometimes it is a function of the fact that the competition hasn’t come for you yet.

So, as I say, what matters in price competition is unit cost. And unit costs in the airline business are denominated in “cost per available seat kilometer” (CASK) in Europe, and “cost per available seat mile” (CASM) in the United States.

This is how Jet2’s CASK compares with the two low cost carriers that are most likely to compete with it in the future:



Consider now that Jet2’s loss of the one quarter of the Royal Mail business will raise its CASK further. Consider also that Ryanair and Easyjet fly much shorter routes than Jet2 does (it costs a great deal more per kilometer…

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