The quiet growth of low-cost airline Jet2 has taken both competitors and investors by surprise – unless you were looking in the places most fund managers ignore.
When I flew to Amsterdam from Stansted last month, I noticed a Jet2.com plane outside the departure lounge. It was a small sign that one of my investments was still performing as I’d hope to see – not in a financial sense, but in a business sense. As such, it was an example of the approach to investment that famed small-cap manager Peter Lynch (see below) calls “kicking the tyres”.
Jet2’s presence at Stansted was notable to me, because it has only recently started flying from the airport. I live in nearby Cambridge where primetime advertisements on ITV are promoting “package tours you can trust”, and the business correspondent of my local paper recently tweeted about the cakes it received from Jet2 on the airline’s 15th birthday. As I waited in the departure lounge, you could use the advertising hoarding to count down to the gate opening as it rotated advertisements. Every third one was for Jet2. There’s no need to kick the tyres, the tyres are kicking me.
Advertising is critical when establishing new routes because an airline has costly planes, manned and serviced by air and ground crews, waiting to be filled. Having followed Jet2 as it has gradually rolled north and south from its original base at Leeds Bradford Airport, it’s reassuring to experience the promotional blitz first hand.
A stealthy expansion
Jet2 is a subsidiary of Dart (LSE: DTG), a travel and logistics firm that also owns a food-distribution arm called Fowler Welch. Financially, Dart’s performance surpassed my initial expectations long ago. However, I think Jet2’s stealthy expansion has caught lots of people by surprise, not least competitors and City fund managers. This may explain why the shares soared 15% this week when the firm said profits will be ahead of estimates (even after this, the shares trade on a price-to-earnings ratio of just ten).
Jet2 specialises in flying people from Britain, where the weather is miserable, to the Mediterranean, where it’s not. The fastest growing and most profitable part of the business is Jet2holidays, a package tour operator, which has trademarked the phrase “Real Package Holidays”.
I don’t think this slogan is a dig at traditional package holiday firms like Tui. I think Jet2holidays has these companies beaten, at least in its northern heartland. It probably provides better service, and certainly at lower cost. It sells direct, over the internet and by phone, and doesn’t have an expensive network of travel agents to support. To find out who Jet2holidays wishes to distinguish itself from, we need to kick the tyres some more.
Holiday with peace of mind
To do that, we need one of these new sources of data that I discuss below. In this case, the Civil Aviation Authority publishes a list of Air Travel Organiser’s Licence (ATOL) holders on its website.
Tui is licensed to carry most passengers. Jet2holidays is now second. Thomas Cook is third. But the two remaining firms in the top five aren’t traditional package tour operators. They’re Expedia and On The Beach, websites that buy seats from airlines, and beds from hotel-room wholesalers (known as bed banks). These firms offer more flexibility through “dynamic packaging”, but they have less control of the product, since they don’t run either the flights or the hotels. Jet2 wants you to know that if you want real peace of mind about your travel arrangements, it sells Real Package Holidays.
I once asked Philip Meeson, Dart’s founder, what sets a Real Package Holiday apart. He said I should take one. Kick the tyres some more, in other words. Now it’s flying from Stansted, I might.
Kicking the tyres in the internet era
Peter Lynch, who ran Fidelity Magellan, one of the best-performing funds of the 1980s, was a big believer in using common-sense observations to inform his trades. Although Lynch (pictured) had the resources of one of America’s largest fund managers at his disposal, he wrote in his bestselling book One Up on Wall Street that “I can’t imagine anything that’s useful to know that the amateur investor can’t find out. All the pertinent facts are just waiting to be picked up.”
Firms were obliged to tell almost all in their annual reports and often added more in advertisements and promotional newsletters. What couldn’t be gleaned there, he said, could be established by reading trade journals, calling or visiting the firm, and grassroots research – ie, kicking the tyres.
This phrase dates from the early days of motoring when tyres were often made from thin rubber that could easily be punctured. Customers kicked the tyres to check their quality. Similarly, Lynch spent time in restaurants and shops sampling the merchandise, famously buying the firm that made the stockings his wife wore and profiting handsomely. He would analyse the car industry in churches and bowling alleys, approaching owners of new cars to ask if they’d recommend them.
If the thought of approaching people in car parks and shops makes you blanch, it’s even easier to research firms and brands online. Just check the reviews on Amazon. YouTube personalities are queueing up to tell you what they think. We can find out how employees rate the firms they work for on sites such as Glassdoor.
Trade journals publish online, and if you really want to know how an industry operates, pray for a Competition and Markets Authority (CMA) investigation. Even partially redacted, its reports are revealing and easy to find on the CMA’s website. The modern version of a corporate newsletter is a firm’s Twitter feed or Instagram account. These new sources of information are a click or two away – yet still unexploited by most private investors.