Jet2 shares clear for take-off once more

Jet2 Ordinary Shares (LSE:JET2) has had a turbulent year with a volatile share price ensuing, although these half-year numbers have restored a degree of calm, leaving the way clear for takeoff once more.

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Having released some impressive metrics at the full-year results in July, much of this was undone in September when a trading update revealed what was effectively a profit warning, with the group reducing seats on sale given a lack of visibility. In a trend which has continued, customers are driving a “fast-moving late booking” environment, which increases the airline’s difficulty in planning, let alone gauging costs which are partly fixed. Shares fell by 13% on the day in September.

However, to some extent the market’s concerns may have been overdone, with these results for the six months ended 30 September trumpeting record passenger numbers and profitability and pointing to a positive outlook, notwithstanding that losses are expected in the second half as is traditionally the case. Increased capacity and marketing spend, along with recruitment costs, are likely to be responsible for those headwinds.

Nonetheless, the first-half progress sets the group up for a decent full-year outturn, with Jet2 maintaining its operating profit estimate of around £453 million, towards the lower end of the previously guided range between £449 million and £496 million, which caused the consternation earlier in the year. In the meantime, revenues grew by 5% to £5.34 billion for the half-year, leading to a 2% increase in operating profit to £715.2 million and a 1% rise in pre-tax profit to £800.3 million.

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The yield per passenger fell by 7% for flight-only customers, as the group needed to invest in lower pricing to attract new business in the height of the Summer season. This seems to have had the desired effect, with flight-only customers rising by 16% to 4.77 million and package customers by 1% to 4.73 million. Overall passengers increased by 5.6% to 14.09 million and has led the group to introduce a 7.7% rise in seat capacity for the Winter season.

In a sign of ongoing management confidence in prospects, the dividend was increased marginally although the projected yield of 1.3% remains pedestrian. Perhaps more importantly, Jet2 has announced a further £100 million share buyback programme, in addition to the previous £250 million which is now complete. This has been enabled by a stronger trading period and a more than adequate cash position, despite the investments the group is making, such as launching a new base at Gatwick ahead of the Summer of next year, which will put Jet2 in front of a theoretical extra 15 million customers.

Of course, the macro environment remains cloudy and the propensity of customers to book late will continue to provide challenges. More broadly, investing in airline shares generally has never been for the faint hearted. The ferocity of competition and economic pressure remain as potential headwinds, as do some of the other issues which have historically blighted the sector, such as virus outbreaks, industrial action, volcanic dust clouds and higher fuel costs. The current macroeconomic and geopolitical concerns add to a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector.

However, and contrary to popular belief, Jet2 is no minnow. It is the third-largest airline in the UK behind British Airways and easyJet, ahead of TUI and Virgin Atlantic. The company has opted to remain on AIM rather than seeking a full listing, and its £2.6 billion market cap makes it the largest company on its chosen index. If it were to switch to a full listing, it would comfortably enter the upper end of the FTSE250 index.

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While the direction of travel has been positive over the longer term, the September announcement led to a sharp share price fall which has led to a 20% decline over the last three months. This in turn has fed in to the shares having lost 13% over the last year, as compared to a dip of 0.5% for the wider FTSE AIM 100 index. However, the shares remain comfortably ahead of their pre-pandemic highs and have risen by 45% over the last three years.

This update should go some way in restoring faith in the group’s ambitious longer-term targets and, despite the clear historical headwinds, it is not unusual for investors to have something of a soft spot for the airline sector. Indeed, the market reaction to this update and the general consensus of these shares as a buy reflects that overriding optimism.