New Short: Dart Group PLC
The Brexit process seems to have reached a crucial stage, with the deadline for an exit deal less than 6 months away and the threat of a hard Brexit. Rather than politicians coming together in a mature and co operative way to negotiate like professional adults, the process seems to have deteriorated into a game of factional brinkmanship with all involved seemingly trying to game what is best for them rather than what is best for countries. While I do not believe in hedging generally, it's time for me to face facts: A hard Brexit will result in a plunging pound, possible economic chaos and possible airline industry specific chaos. In addition we are in a rising oil price environment, which has in the past caused the downfall of many an airline. Given my largest investment in in a small, not very profitable airline, a hedge is necessary because there is a chance it goes bankrupt if a certain type of Brexit occurs and the oil price continues to rise. That hedge is Dart Group PLC: It's a UK package holiday company which runs its own airline and offers flights only as well. It's profitability and share price have had a good run recently as a competitor has gone bankrupt, the economy has remained stable and its particular offering has struck a chord with holiday makers. It has no competitive advantages and trades in the teens in terms of P/E ratio. I feel it is fully valued and the risk of Brexit is not priced in. Given nearly all its routes are to Europe, and an extremely large proportion of costs are outside the GBP given it not only runs airplanes but has to buy hotels in Europe, it will get hit extremely hard by a GBP shock. I tried to do some work to calculate the ideal hedge ratio for Dart Group PLC vs Flybe but then realised it's a fools game: 1:1 seems as good a guess as any and the aim of the hedge is purely to prevent a hard Brexit making a sizeable hit to my portfolio. I will reassess in 6-9 months when hopefully the outcome of the initial negotiation is known and developments in the oil market have also played out.
