Dart looks good for summer travel

The UK leisure travel business Dart Group has seen a better than expected winter performance and strong demand for summer 2015. The UK economic recovery and the weak euro look set to support demand going forward.  Margins will also strengthen if the fall in oil prices isn't offset by lower ticket prices.

Dart Group operates the budget airline Jet2.com and the package holiday business Jet2holidays.  Together these form the Leisure Travel division which accounts for over 90% of Dart Group's operating profits. The Jet2holidays business has been growing rapidly and supports seat sales at Jet2.com.  In the six months to September 2014 package holiday customers were a third of all passengers flown, up from 31% the year before.

Dart Group's budget airline: Jet2.com

Dart Group's package holiday business: Jet2holidays

The geographic focus of Dart Group is on the North of the UK with key airports Leeds Bradford, Manchester and Belfast.  This makes Dart Group dependent on UK consumer confidence outside of the prosperous south of the country.

Dart Group's UK airports and some European destinations

Source: Jet2.com website

For the financial year to March 2015 Dart Group expects underlying operating profits to be ahead of current market expectations and in-line with last year.  This is due to lower than anticipated winter losses at the group.

Looking to the 2015 summer season and as of 13th March over 50% of capacity was sold which is ahead of the same time last year.  The positive trading update saw Dart Group's share price decisively break above the £3 level.

The trading update does, though, feel like a sense of Déjà vu because in April 2014 the company was also optimistic for the summer.  However, in June 2014 Dart warned of weak demand which pushed the share price back below £2.

Reasons cited for the change included the World Cup, the weather and the lack of a financial recovery in the North of the UK.  As such the load factor and net ticket yield both fell back in the half-year to September 2014 on the year before.  

Dart Group in summer 2014 & 2013: How will 2015 stack up?

Source: Dart Group interim financial report 2014

In our view, leisure travel demand for summer 2015 is likely to be much stronger than in 2014.  Clearly, we do not have the World Cup this year, to keep consumers in the UK, and the economic recovery has been gaining momentum.  

Falling inflation also means that real wage growth is set to return in 2015 for the first time since 2007.  This will benefit the whole of the country and should make consumers in the north of the UK more optimistic.  

The cost of a holiday in Europe has also fallen back with the euro having weakened significantly against sterling. Travel costs for families have also been reduced due to the scrapping of air passenger duty for children under 12.

The strength of sterling against the euro

Turning to industry margins and the fall in the oil price is supportive with fuel around a third of the cost of narrow body planes.  Dart Group also operates relatively old planes which are less efficient and so more geared to lower prices.

Competition could hit margins with Ryanair, the low cost leader in Europe, pursuing an aggressive expansion strategy.  In our view, the growth of Dart's package holiday business, Jet2holidays, should help to mitigate this threat.  

Another risk is the cost of compensation for late flights following the loss of a key court case.  Dart Group made a £17m provision in its previous interim financial report but this is only an estimate of the expected cost.

Source: IATA website

Summary and valuation

Airlines and holiday companies have little forward visibility and therefore often surprise the market with unexpected updates.  However, summer 2015 looks set to see strong consumer travel demand given the current market backdrop.

The weak euro and improving consumer sentiment suggest that holidaying in Europe will be a popular choice this summer.  Airlines are also set to benefit from the recent fall in oil prices as long as it isn't offset by lower ticket prices.

Turning to Dart Group's valuation and for the current year to March 2015 the consensus forecast P/E is 15.3X.  This falls to 12.8X for the year to March 2016 and then 12.2X for the following year.

These figures don't look expensive given Dart Group's long-term track record, operational leverage and potential for further growth.  At the same time the airline industry is volatile and so negative surprises cannot be ruled out.

This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto