Capacity Expansion And Gatwick Ramp Will Pressure Margins But Leave Long-Term Potential

Catalysts

About Jet2

Jet2 operates a U.K. focused, fully integrated leisure travel business combining an airline and a package holiday tour operator.

What are the underlying business or industry changes driving this perspective?

• Although the U.K. holiday market is described as growing and many consumers treat overseas breaks as an essential purchase, rising accommodation inflation of about 5% to 7% and higher wage and SAF related costs could limit Jet2’s ability to sustain current pricing power, which may weigh on net margins and earnings if cost growth outpaces revenue.
• Despite long term support from consumer demand for Mediterranean and Canary Islands leisure travel, the planned capacity increase to about 20.1 million seats in Summer 2026 including roughly 900,000 seats from Gatwick, alongside late booking patterns, raises the risk that load factors or flight only pricing need further discounting, which could pressure revenue per seat and EBIT margins.
• While the roll out of more fuel efficient Airbus A321neo aircraft and the expectation that around 65% of the fleet could be unencumbered by 2030 support lower unit costs and balance sheet strength, the sizeable £950 million average annual capex from FY 2027 to FY 2030 and use of financing introduce execution and refinancing risk that could affect free cash flow and return on capital.
• Although Gatwick is described as a once in a generation opportunity with access to roughly 50 million people within 60 minutes and an expectation of profitability by FY 2029, start up losses of potentially late single digit margins at the base, higher airport and labor costs and reliance on future slot availability mean the route to meaningful profit contribution and EPS support is uncertain.
• While Jet2’s growing data assets, AI led revenue management pilot and an 8 million plus myJet2 membership base may support more targeted marketing and ancillary sales, continued pressure on late booking behavior, competitive promotional activity and potential limits on passing through hotel and airport cost inflation could cap gains in non ticket revenue and overall earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Jet2 compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Jet2's revenue will grow by 7.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.1% today to 4.1% in 3 years time.
• The bearish analysts expect earnings to reach £378.2 million (and earnings per share of £1.98) by about January 2029, down from £454.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £466.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.3x on those 2029 earnings, up from 6.2x today. This future PE is greater than the current PE for the GB Airlines industry at 7.1x.
• The bearish analysts expect the number of shares outstanding to decline by 6.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is targeting medium term capacity growth of about 4.4% a year and plans to increase total seats through both more aircraft and higher gauge A321neo jets. If demand for U.K. outbound leisure travel remains resilient or grows, higher volumes could lift revenue and support a higher valuation than a flat share price assumes, especially if load factors and ancillary spend per passenger hold up, which would support earnings.
• Jet2 expects Gatwick to be profitable by financial year 2029 and sees the airport expansion and potential dual runway as a once in a generation growth opportunity. If the base scales successfully beyond the initial 6 aircraft, with strong package holiday take up in a large catchment area, the resulting additional profit contribution could push earnings and investor sentiment higher than a flat share price view allows for.
• The fleet renewal plan involves 132 more Airbus aircraft over the next decade and management reports an average cost per seat saving of £10 on A321neo aircraft. If fuel efficiency, lower carbon costs and airport friendliness of quieter jets translate into sustainable unit cost advantages, net margins and return on capital could stay healthier than a zero share price change scenario implies, which may support a higher earnings multiple.
• Management highlights a growing, highly engaged customer base, with over 8 million myJet2 members, more than 11 million marketable customers and higher retention for members. If this loyalty, data driven marketing and AI led revenue management continue to improve customer acquisition and retention economics, the company could sustain or grow revenue per customer and EPS faster than a flat share price expectation builds in.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Jet2 is £14.5, which represents up to two standard deviations below the consensus price target of £18.98. This valuation is based on what can be assumed as the expectations of Jet2's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £23.5, and the most bearish reporting a price target of just £14.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be £9.2 billion, earnings will come to £378.2 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of £14.21, the analyst price target of £14.5 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.