Silverjet, the business class airline that flys from Luton, has come down to earth with a bump. Its shares have slumped 28% to 35.5p after a savage sell note from broker Daniel Stewart.
Analyst Mike Stoddart began coverage of the company today - the directors may wish he hadn't bothered - by saying: "Our target price is nil. We would sell at any price."
There's more - 32 pages in all. Stoddart goes on: "Its low fares have failed to generate the load factors needed to make any money. While it posted an 80% load factor for August 2007, this was achieved, at least partly, by taking bookings for two flights per day and, as a consequence of unforeseen maintenance work, operating only one.
"Now that frequency has been doubled on the Newark route and the Dubai route has been launched, load factors have collapsed to just over 50% and we have yet to see how things will look for the seasonally quiet months of January and February. As with other UK airlines, it recently launched a January sale in order to boost demand.
"At the current blend of oil price and exchange rate, we estimate that jet fuel will be costing Silverjet about 23% more per rotation (or round trip) than the average it experienced in half year to September 2007.
"Overall, Silverjet's current performance - average return fares of about £1,180 and load factors of 52.8% - is so far adrift of what is required that, in our view, the business is doomed to fail unless something changes - significantly and rapidly. With these figures, each return flight will be earning revenue of about £62,300 and, with all-in costs of perhaps twice that amount, generating sizeable losses.
"As a consequence of all this, we expect Silverjet to produce a bigger loss in the second half than the first and more, substantial losses next year. It is difficult to be precise about the effect on cashflow because of the potential size of some of the working capital swings.
"The next test for Silverjet is whether, having done their due diligence, the Reuben brothers decide to convert their £10m loan to equity at 60p per share. Their last conversion date is 11th February 2008. Whether they do or don't, we consider that the company will need another equity issue in the next year or so simply to offset its losses and stay in business."
A buy note from Silverjet's broker Arden has done little to limit the damage. But for the sake of balance, Arden reckons: "[The seat sale] is helping boost passenger numbers in the seasonally quiet month of January but also providing a good base level of bookings for future months - around 70% of bookings last week were for February onwards. Whilst yields under the sale are below our forecasts for Silverjet, yields will be managed upwards as the planes fill following the typical low-cost model.
"The recent investment by the Reuben brothers is a significant and positive development which has yet to be reflected in the share price."
