I am re-evaluating how much Dart Group (DTG) could be worth coming out of this crisis. In considering the reasonable price to buy DTG under the current conditions, one would evaluate the following factors – 1) chance of DTG survival (liquidity analysis); 2) loss incurred during this crisis, 3) competitive landscape, and finally 4) the normalised earning power coming out of this crisis.

1. Chance of survival

Based on GBP 1.5bn of cash and roughly GBP 800m of the annual fixed cost base, I estimate the following chances of survival. In theory, DTG can sustain itself for an entire year based on the current liquidity profile. However, there are a few catches. DTG customers pay upfront for their summer holiday. Typically Jan and Feb account for a bulk of the summer holiday bookings. If the current lockdown extends into the summer months, customers would want their refunds. This could severely impact the liquidity situation if it so happens. Many UK travel companies are issuing Refund Credit Notes (RCN) that is backed by the UK package holiday regulator, ABTA, to avert the liquidity crunch. In the case of travel company failure, consumers can buy another holiday using the RCN. ABTA’s backing ends on 31 July 2020 after which customer can demand cash repayment if they have not used the RCN to book another holiday. On the hotel side, DTG typically buys up some capacity to guarantee supply quality. DTG would have to balance the long term commercial relationship and the short term need for cash. Given the level of unprecedented fiscal and monetary policies that are announced, the government’s willingness to intervene is strong. While I would not count on that necessarily, it is a factor in considering the chance of survival.

Length of lockdown Chance of survival
3 months 99%
6 months 80%
9 months 75%
12 months 70%

The main point here is that on balance DTG’s chance of survival is very high even in extreme scenarios.

2. The loss incurred during this crisis

The first step to estimating the possible range of loss sustained in this crisis is to estimate the revenue decline. I used Jet2’s monthly traffic in 2018 and 2019 to approximate the amount of volume decline and layer on price declines.The table below shows the weight of each month traffic as % of the full-year traffic. So if we assume a three-month lockdown, there would be zero revenue in Apr / May / Jun which meant a loss of ~30% of full-year traffic. The actual traffic loss is going to be greater than 30% because the process of demand recovery is going to take time. For simplicity sake, I will use 5% to account for the volume loss during the demand recovery process.

Length of lockdown Volume Decline Price Decline Revenue Decline
3 months 35% 20% 50%
6 months 75% 20% 90%
9 months 90% 20% 95%
12 months 100% n/a 100%

The assumption of the price decline of 20% might be too generous but it does not really matter. Because the point of this analysis here is to show that the revenue decline is close to 100% as long as the summer months are lost.

2018 2019
Jan 3% 3%
Feb 3% 3%
Mar 4% 5%
Apr 6% 6%
May 10% 10%
June 13% 12%
July 14% 13%
August 15% 14%
September 13% 13%
October 10% 11%
November 5% 5%
December 4% 5%

Assuming 3-6 month of lockdown and a fixed annual cost base of GBP 800m, the loss incurred is likely in the range of GBP 400-800m.

3. Competitive landscape

On the supply side, the materially higher debt level will limit growth capex in the next 2-3 years. This would provide a favourable backdrop to medium term (2-3 years) ticket price recovery. However, it also provides an opportunity for new entrants with a clean balance sheet to compete against the incumbents as they don’t have to carry the cost of debt. On the other side, many smaller competitors will probably go out of business and free up more demand.It is not clear what this means for Easyjet’s venture into the package holiday. Maybe they are less committed to a large marketing budget to support the new business. Or maybe it doesn’t cost that much to push the packaged holiday business.For Tui, I think DTG is likely to come out of this in a stronger position relative to Tui as DTG’s balance sheet is stronger and a lot less asset-heavy versus Tui. Tui’s offline distribution network is going to be massive cost drag while DTG relies on more nimble independent travel agents.Generally, I do expect DTG to come out stronger relative to its core competitors.

4. Normalised earning power

Assuming that by 2024, the traffic volume is back to 11m per pax vs 14m in 2019. And assuming a pre-coronavirus ticket yield of GBP 82 and average holiday price of GBP 680, DTG’s leisure revenue looks like GBP 2.4bn. Putting an 8% EBITDA margin on the top, DTG would be making GBP 200+m. The normalised earning power is probably ~ GBP 150m. With a 10x multiple, DTG is worth ~ GBP 1bn. There would probably be another GBP 100-200m of net debt. That leaves the equity value around GBP 800m.So given the risk-reward and the opportunity cost, I would consider buying DTG shares around GBP 300-400m market capitalisation which gives me an IRR of 25%.