There's big news at this entertaining AGM

The arrival of a company's annual report is a reminder that the Annual General Meeting is almost upon us, where questions not answered in the document may be asked in person. Some AGMs are more entertaining than others. Dart's certainly is.

Share price-wise, supersonic Dart has gone into a shallow dive lately. The company, which owns leisure airline Jet2.com and a rapidly growing package holiday company Jet2holidays, performed extremely well in the year to March 2016, with profit almost double the previous financial year and almost five times the level it was achieving a decade ago.

Can good news also be bad? This was a year when everything went well. Principally, Jet2.com raised prices while one of its major costs, jet fuel, fell. It flew with fuller planes, and sold more stuff to passengers. Even Fowler-Welch, Dart's somewhat out-of-place UK grocery distribution business, did well.

A year when everything went right may not be the best guide to the futureBut, although Jet2.com has established a profitable niche flying holidaymakers, particularly families, from northern British cities, its bumper year is a reminder that airlines are susceptible to forces outside their control. Demand for holidays is dependent on the general level of prosperity and jet fuel prices go up as well as down.

A year when everything went right may not be the best guide to the future. Indeed, the company has since announced that ticket yields and load factors (average fares per mile and how full the planes are) are slightly lower this summer than they were last summer, although it's flying more planes and bookings are not slowing down.

Future won't resemble the past

The future will not resemble the past in at least two respects any way. The shape of Dart's balance sheet is changing, because Dart's passengers are going to be flying in 27 shiny new Boeing 737s.

Capital expenditure almost tripled in 2016, partly because it included deposits and pre-delivery payments for new planes that will, by 2019, increase the size of the fleet from 60 to 80. The first one arrives on Monday. Borrowings increased, too, and will probably carry on growing as Dart takes delivery of the planes.

Debt adds to the cocktail of financial instruments, operating leases, contracts to hedge the risk of movements in jet fuel prices, and cash from the advanced sales of tickets, that so complicate airline accounting. Investors like me, who took refuge in Dart's net cash position as a kind of collateral against financial and operational mishaps, will mourn its loss.

At last year's AGM, I asked Dart's finance director to explain hedge accounting to me and I got some way to understanding. This year's AGM was yesterday and I asked chairman Philip Meeson what he means by "real package holidays".

A product that's not easily replicated is of immediate interest to a long-term investorSelling package holidays is more profitable than selling tickets alone, and the improvement in profit was partly due to the fact that a greater proportion of passengers are going all-in (40% of outbound passengers in 2016). Meeson uses the phrase "real package holidays" repeatedly in the annual report, saying they are not easily replicated by non-specialists.

A product that's not easily replicated is of immediate interest to a long-term investor because it implies that the opportunity to profit from it will be long. There's a difference, of course, between buying a package holiday and just buying a flight and a hotel room on an airline's website.

The latter is like buying two separate items at a supermarket and paying one bill. The former is more like having someone carry your basket around the supermarket, take the food home, cook the meal for you and pay for your treatment if you're hospitalised with food poisoning. Dart allows some of its customers to check baggage in at the resort, saving them time and hassle at the airport, a service it says is unique.

But it's less clear what distinguishes Jet2holidays from, say, Thomson or Thomas Cook, or any of the other package tour companies.

It comes down to service and pricing. Each member of the board emphasises customer service: How it has people at the airports, people in the resorts, how the company is not run to maximise profit margins, but to maximise customer experience, how it owns its own planes so it can control the journey from boarding the departing flight to disembarking from the returning one.

Creeping southward

Finance director Gary Brown highlights a 24/7 customer helpline. Meeson, though, invites me to take a holiday. He asks me where I'm from, and to his mirth establishes I'm from Cambridge. Potentially, I'm a customer for its newest routes, to be announced in two weeks.

The big news at the AGM is that Jet2.com is continuing its creep southwards to Stansted, my local airport, growing by establishing new bases in adjacent airports as it has extended from Leeds through its northern heartland, and now finally into the South. The incremental expansion builds on the firm's local reputation and marketing, but the company also has its eye on the competition.

Stansted is underserved by package holiday operators, Meeson says, and I conclude its willingness to fly from airports that are unfashionable among holiday companies, but convenient for large numbers of passengers, is part of the reason Jet2holidays has grown so fast.

Even real package tours from regional airports may not be too hard to replicate if real package holiday operators put their minds to it. The goodwill of Jet2holiday's passengers may be, though. One theme, repeated many times by Dart's executives, is that if you give people a great holiday, they come back. I'm sure they tell their friends too.

It's financially complex, but at the highest level Dart is a profitable, growing, cash generative firmAs I pass Meeson on the way out I say "Goodbye, Sir Philip". He's not a Sir, but apparently I've mentally knighted him. Perhaps it's because of his services to the Share Sleuth portfolio; Dart has contributed the most to its performance since I started it in 2009. Or perhaps I've associated him with the real Sir Philip, whose reputation is perhaps no longer held in such high regard.

I leave, as usual, conflicted by Dart. The airline business is risky, but management impress (Meeson, the entrepreneur who built the business, is unlike anyone I've ever met, affable but blunt, mirthful but serious. His lieutenants Gary Brown and Stephen Heapey, who runs Jet2, exude competence).

It's financially complex, but at the highest level Dart is a profitable, growing, cash generative firm. The market valuation based on 2016 earnings is enticing, but we know 2016 was exceptional, not just because it was, but because the company says 2017 won't match up to it.

A share price of 480p values the firm at about 10 times adjusted 2016 profit. The earnings yield is 10%. Based on average profitability that comes down to about 6%.

The truth is probably somewhere in between.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.