Jet2 soars on improving demand

The revival in demand for air travel hasn’t been smooth, but it’s clear the low-cost operators have led the way.

Although flight numbers within Europe were 13.1 per cent lower during the summer than in 2019, low-cost carriers have also taken a much bigger share – 33.7 per cent in September, up from 32 per cent in the same month three years ago. Ryanair (IE:RYA) operated more than 10 per cent of all flights across Europe in the first nine months of this year, according to intergovernmental body Eurocontrol.

Jet2 (JET2) has sensed its opportunity, agreeing an order with Airbus (FR:AIR) last month for 35 new A320neo aircraft, worth $3.9bn (£3.2bn) at list prices. This came with an option to extend to 71 aircraft worth up to $8bn on paper, although the company has “negotiated significant discounts”.

These build on another order placed in 2021, meaning it has 98 firm orders and the possibility to extend to 146, providing "certainty of supply well into the next decade", the company said.

Placing these at a time when demand still significantly lags capacity is brave, but given the weakness of the balance sheets of many competitors it makes sense. Besides, the company is once more throwing off enough cash to afford it. Cashflow from operations of £799mn generated during the half was higher than the £789mn figure for the whole of last year.

Despite having to fork out £50mn in compensation to passengers affected by airport disruption, Jet2’s operating profit of £517mn for the six months to September was a substantial improvement on the £170.4mn loss declared in the same period last year and a 42 per cent uplift on pre-pandemic levels.

This was partly due to it flying more planes – seat capacity was 14 per cent up on 2019 – but also doing so more profitably. Its flight-only ticket yield of £105 per passenger was 43 per cent higher than last year and 18 per cent ahead of pre-pandemic levels. It also made a higher margin on the package holidays it sold.

Household budgets are going to be stretched next year but customers will more likely seek low-cost bargains than abandon breaks altogether. Despite facing higher fuel and labour costs, Jet2 expects to beat analysts’ full-year pre-tax profit expectations. The company's shares rose by 3 per cent but are still 17 per cent lower year-to-date and at less than 9-times forecast earnings are competitively priced. Buy.

Last IC View: Hold, 784p, 07 Jul 2022