this out this morning from Daniel Stewart
Likely to fail
· We are initiating coverage of Silverjet this morning with a share price target of zero on a 12 month view so the recommendation is a SELL. Our reason is that the business model doesn’t work, we can’t see that it ever will, and we expect the company will eventually run out of cash. Our forecast is for a pre-tax loss of £31m in the year to March 08, and about £27m the following year.
· The business case at the IPO was very simple - that you could operate a B767 on a London New York route for a round trip cost of about £67,000 so with a fare of about £999 return you only need to sell 65 of your 102 seats (a load factor of 63.7%) to break-even – anything beyond this level is profit. They were still using these figures when we met management in December and they repeated the claim to the Daily Telegraph last week.
· We reckon the claim just doesn’t stack up. For a start, it excludes advertising, marketing, depreciation, and all admin costs. These can add up to quite sizeable figures. Also, since the IPO the sterling price of jet fuel, their biggest cost, has gone up by about 16% - you need to sell 4 extra seats for every flight just to cover that cost. If you add it all up, you can easily arrive at a theoretical break-even point for the company of as much as 85%.
· In practise, things have been a lot worse. In the half year to September 2007, the scheduled airline lost £11.7m on turnover of £12.2m– despite achieving a load factor in the period of nearly 70%. So load factor was 6pc above their claimed break-even yet they still made a big loss. The problem was its operating costs – at £135,755 for each return flight – more than double the claim of £67,000 in the IPO document. When you ask the company about this, they say that they are now re-working the model.
· Current traffic levels are dire; load factor for Q3 was just 55.2% and now that we are in the real low point for UK airlines (Jan-Feb) Silverjet, like all the other airlines, has launched a sale with price cuts of 20%. Although the company raised £21m last month we reckon its H2 loss will consume about 84% of these proceeds.