Can the airline sector and Jet2 (LSE:JET2) – the new name for Dart Group – make it through what is looking like it will be a tough COVID winter? You’ve got to feel sorry for Jet2; things were looking up in the summer with the virus slowing down and the holiday sector starting to come back online, but then the Home Office started slamming short notice quarantines on various European holiday destinations, making the task of running an airline more complex.
One of the key markets for Jet2 has been Spain, which has been on the UK quarantine list since July and shows no signs of coming off it. Jet2 has been forced to cancel all flights to popular UK holiday destinations like Alicante, Malaga and Barcelona until 17 October at the earliest. The weather is getting colder in the Mediterranean, and it looks as if the airline won’t be able to squeeze a few more ounces of profit out of the late summer get away crowd.
Jet2 is obviously going to be hoping that it can resume flights to winter sun destinations like the Canary Islands, including during the the key half term break at the end of October. But it is looking increasingly likely that the UK will not treat the islands as a separate destination from mainland Spain in terms of coronavirus quarantine evaluation.
Return of the virus has hit the share price
When we last checked in on Dart Group / Jet2 in July we viewed the stock as a risky short to mid-term investment. We noted bookings were being taken for 2021. Jefferies International had rated it a buy with a GBX 1050 target price. While flights were starting to resume in July, we took the view that the airline was a slightly riskier longer term play, with investors having to expect to ride out what we saw as “the spectre of a second wave, which could cause some flights to be cancelled in the future.”
Jet2 itself said last month that it was planning to fly to all its popular leisure destinations next summer, which “we anticipate will be close to summer 2019 seat capacity levels.”
Our analysis was that the airline sector would experience a slow recovery, and that investors would need to be patient with travel stocks. In July we still considered a second wave very likely in the winter months, with the realistic expectation that no COVID vaccine would be forthcoming before the end of the year.
Can Jet2 get through the winter?
The Jet2 share price had been ramping up in May in expectation of the holiday season and with the virus in retreat; it just broke a pound before it slid through the summer months to trade at just under 700p going into the end of September. Jet2 has the scope to get back up to £2 eventually, but the stress is on eventually. Bear in mind this is also a smaller airline with less strategic significance to the government. It is no IAG. Thus there is going to be no obligation felt by the government to bail out Jet2 if it runs out of cash during the winter, although it does have recourse to a considerable Bank of England financing facility.
We think this is a slight possibility at the moment. Airlines are operating again and are making money. If anything the fall out of a hard Brexit represents a more significant threat for Jet2 right now than the virus.
The technicals are pointing at an undervalued stock, supported by a price-earnings ratio of 9.45. The debt ratio sits at 1.14 and Jet2 reported a 28 August cash balance of £1.06bn versus £1.387bn at the end of March. It has not tapped the Bank of England’s COVID corporate finance facility either. A big worry would be whether the company has the cash to make it through a much reduced slate of flights between now and Easter. On the surface, the financials say it can, making it a more substantial value play if you are happy to sit on the stock for six to nine months.
A further trading update is due 19 November.
