Will long-haul be next on Jet2holidays' agenda?

Jet2holidays has achieved sustained, profitable growth for its PLC shareholders since its founding in June 2007, with industry veteran Steve Heapy at the helm since 2009. But what’s its next major strategic move? 

 

I think looking back at the history of Airtours’ rapid expansion in the 1990s may give us a few clues.

 

Having left MyTravel in 2003 to establish the dynamic packaging specialist On Holiday Group (OHG), I knew it was likely that MyTravel would collapse or be taken over by a competitor like Thomas Cook (this happened in June 2007), and therefore in 2006 I pitched the idea of creating a replacement to Jet2’s commercial director and its chief executive Philip Meeson.

 

The pitch was straightforward: integrate Jet2’s flight pricing engine with our packaging engine supplied by OHG’s bed bank, and generate millions of holiday options with no risk, as flights would either be sold as flight-only at an average £6 margin or upgraded to packages with an average £60 margin, delivering a tenfold increase in profits, an earlier booking profile and more customer cash.

 

Sounds too good to be true? Meeson certainly thought so, but decided to give it a go since the risk was so low, and that’s how Jet2holidays was born.

 

First-year volumes exceeded all expectations, and the shrewd Meeson decided to rip up OHG’s three-year contract, copy our technology, and take the strategically important project in-house, recruiting Heapy and other MyTravel staff, as the merger with Thomas Cook destroyed its northern offices, freeing up many talented tour operator figures.

 

The rest is history, and Jet2 is now the UK’s largest tour operator, transporting seven million passengers and preparing for further expansion with its new Gatwick base. Considering Gatwick is one of the cheapest airports to operate from and provides access to the largest UK holiday market, opening this base seems somewhat late. However, with easyJet’s dominance of Gatwick slots, its entry is likely to spark a price war as Jet2 establishes its routes.

 

When Airtours decided to go national from its northern roots, it added a further layer of vertical integration by buying Pickford Travel shops and Hogg Robinson branches to form Going Places, which instantly gave Airtours distribution in the south to support its growth in flight operations from Gatwick.

 

Given the online nature of Jet2holidays’ business, acquiring retail shops seems unlikely, but it highlights how crucial access to the travel trade’s southern shop network will be for its Gatwick expansion. Therefore, southern agents should anticipate some significant volume override targets in the coming years.

 

Looking back at Airtours’ rapid expansion may also provide some clues to Jet2’s next major strategic moves.

 

Airtours initially operated a single MD83 aircraft fleet ideal for short-haul holidays, but its size was always restricted to 60% of the tour operator’s total summer capacity, due to the difficulty of using these aircraft in the winter.

 

To overcome this restriction, Airtours decided to establish a long-haul programme to Florida and the Caribbean using third-party charter aircraft, which it then replaced with an internal fleet once volumes reached a critical mass needed to operate a five-aircraft long-haul fleet, the minimum required for operational efficiency.

 

Jet2 is probably considering the same move, as falling out of the high-margin long-haul market to Tui seems daft. However, finding a partner to provide the aircraft needed for the initial growth phase, while they are aware of Jet2’s longer-term plans, is clearly a challenge. The need for backup aircraft, parts and crews makes organic growth difficult unless these larger-capacity, long-haul aircraft can also be utilised on high-volume short-haul routes, which, ironically, mainly operate from Gatwick and Manchester.

 

Airtours also expanded internationally to address its winter flight capacity issues, investing in counter-cyclical markets by acquiring Scandinavian Leisure Group and Sunquest in Canada, which allowed it to redistribute airline capacity globally during its slower UK winter months. 

 

Given current ownership structures, few of these opportunities are available now, but Jet2 must reduce its dependency on the UK market, and international expansion appears to be the next logical step in its growth trajectory.

 

As easyJet has discovered, organic growth in flight-only services across other European markets can be both slow and costly. Therefore, a more sensible approach would be for Jet2 to leverage its strong balance sheet and access to capital through the UK stock exchange to acquire a major tour operator, into which it could immediately inject its flight capacity.

 

The obvious market to target is Germany, since its holiday bookings are three times those of the UK. Given that Tui is the leading company, the next best option is Der Touristik, owned by Rewe Group. Other options do exist, but FTI’s financial problems make it an unlikely acquisition, and fifth-place Alltours is probably too small to be considered.

 

Expansion into hotel or cruise ship operations, like Tui, is also a possibility, but Jet2holidays has shown no such appetite so far.

 

My bet? 

 

Watch out for the launch of a long-haul programme before 2030, followed shortly by an international acquisition.