Silverjet chief defends strategy as airline's value crashes to £11m

Investors who chose to sink their money into Silverjet – the all-business class airline based at Luton Airport – were no doubt reassured about the high-risk project by the track record of its chief executive, Lawrence Hunt. Before his latest venture, Mr Hunt had run and successfully exited four companies in the rough-and-tumble technology industry – where the ups and downs are more extreme than almost any other sector except, perhaps, the aviation industry.

It is a business that requires nerves of steel. Indeed, while the AIM-listed company's shares plumbed new lows yesterday – dropping 22 per cent to 17p to value the group at just £11m – Mr Hunt was on holiday. Whether shareholders will interpret his break, at a time when the outlook for the carrier has ostensibly never been worse, as a sign of cool-headed confidence is unclear.

By any measure, it has been a brutal few months for Silverjet. The fall in its share price reflects a growing sense of foreboding about the viability of the all-business class airline model. Silverjet's descent was accelerated this week by two pieces of bad news. Firstly, the billionaire Reuben brothers, David and Simon, declined on Monday to convert a £10m loan they had given the company into a 22 per cent stake. Despite claiming that they "continue to believe the company has a sound business model and excellent prospects to become a major player in the global aviation business", their decision – fewer than three months after their initial loan – sent a worrying signal about their confidence in the business.

Secondly, Silverjet's more expensive, higher-end rival Eos announced plans to launch a London to Dubai service that will compete directly with Silverjet's recently-launched flights to the emirate, as well as an additional route to New York via Newark Airport. The companies already go head-to-head on the London to New York route – the only other service that is operated by Silverjet, which targets luxury holiday and business travellers. Analysts are worried that an economic slowdown on either side of the Atlantic will kill the "urge to splurge" that is crucial to Silverjet. At about £1,000 for a business-class return to New York, the company's fares are a fraction of BA's, which can charge up to five times as much.

Throughout Silverjet's downward share spiral – it has lost more than 85 per cent of its value since it was floated in May 2006 – Mr Hunt has stuck to his pledge that it will reach operational profitability by next month.

Yesterday, he dismissed the shares sell-off as an over-reaction. "It's ridiculous. We have built a business that is a month or two from profitability, which is three months ahead of the original plan at the IPO," he said. "When you are developing a challenger business and it is listed on the market, it attracts a lot of attention, not all of it good."

He said he expected Silverjet's load factor – the number of seats filled – to be "above 60 per cent" this month and that they should reach 70 per cent in March. The airline needs an average of 65 per cent of seats filled to break even.

Even so, analysts remain sceptical about the prospects of the business-class only model. "As consumer propositions go, they are superb value for money," said Andrew Lobbenberg, an aviation analyst at ABN Amro. "But whether they can establish the yields and load factors they need in an increasingly challenging airline market is unclear. I don't think they are hopeless cases."

Start-up carriers had the advantage of much lower overheads but were hindered by the lower frequency of flights and the lack of large corporate contracts that larger airlines counted on, Mr Lobbenberg added.

With MAXjet having gone out of business on 26 December, Silverjet's only rival is Eos, which targets business travellers who can afford £3,500 for a round-trip fare. Eos's challenge is to wrest large corporate accounts from the legacy carriers, a task arguably more daunting than that which lies ahead for Silverjet. Eos, which began flying more two years ago and remains far from profitability, has not been subjected to such negative publicity as Silverjet, mainly because it is not listed and thus does not have to provide regular updates to the City. However, it has burned through much of the $260m it raised from its backers – a group of private equity investors led by Golden Gate Capital. Both airlines could face stiff competition from BA, which this month unveiled plans to launch a business-only service next year, but Mr Hunt claimed it would not be able to match Silverjet's prices because it would cannabilise its Heathrow premium passengers.

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