A stock to make you love airline food

After a turbulent history, business could be about to take off for this London-listed small-cap food supplier. Tom Bulford examines its prospects.

Last year theJourney Group(LON:JNY) dished up 1,672,500 meals for travellers leaving Los Angeles airport aboard UAL flights, and it hopes in future to be catering for many more.

This is the primary ambition of a company that has been through some tough times of late. It's been a long time since Journey has been on the radar screen of the average investor. But all the while it has been sorting itself out.

No research analysts or PR men have been employed to broadcast news of this recovery. So to find out what has been going on I went down to Southall, on the fringe of Heathrow Airport, to meet Finance Director Carl Fry.

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How Journey was rescued from chaos

When I tell you that Journey Group used to be called Watermark, it might stir some memories. Watermark's original, and highly successful business idea, was to supply airlines with those cosmetic packs and kiddie goody-bags that are handed out free to passengers.

Sourcing the products from the Far East and running an efficient delivery service, Watermark prospered and the share price hit almost 200p back in 2004. Then it all went wrong. Journey decided to get into the airline catering business, it overpaid for Air Fayre, soon got into serious financial trouble and when Fry joined in 2008 he found a business "pretty well in chaos".

The shareholders decided it was worth saving the business, but it has been a hard road back - not helped by striking airport workers, ash clouds and effect of the recession on air travel. However, last month Journey made a decisive break with its past by selling its 49% in Alpha-AirFayre for £3.5m, thus withdrawing from a troublesome business and enabling it to repay the majority of an expensive loan.

And that could herald a major turning point for the company.

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Three developments that could transform Journey

The sale of Alpha-AirFayre leaves Journey with a decent balance sheet and four different businesses. Two of these are relatively small. These are 'Media on the Move', which essentially means supplying newspapers and magazines at the airport or on board the flight, accompanied by some targeted advertising; and M & H Sustainable Cabin Services, which takes headsets, and increasingly kits and recycles them. Then there is the original business of supplying kits which has been difficult of late but is now, in Fry's view, at the bottom.

However, the best hope for Journey lies in its catering contract with UAL. Journey originally pitched to win UAL's business for flights out of Heathrow, but such was its poor financial state at the time that UAL looked elsewhere. UAL though was impressed by Journey's business model. Rather than having big kitchens cooking up airline meals on airport fringes, Journey buys in the food from third parties, assembles it on trays and then delivers it on to the plane. This gives it flexibility, avoids the need to deal with unionised kitchen staff and, because it charges for the service while simply passing on the cost of the food, it enables it be price competitive.

In 2008 UAL appointed Journey to provide the food for the seventy daily flights departing from Los Angeles. This has been a success for both sides. It is the main contributor to Journey's profits, while UAL has been so impressed that it has named Journey as its best food supplier both in terms of reliability and quality.

So the question now is whether Journey can build on this success. It has one surprising advantage, in that its business model is patented in the USA, so no rival can copy it. So three different scenarios are possible.

Since appointing Journey, UAL has merged with Continental. Continental runs26 flights per day from Los Angeles and the contract with its own meals supplier ends in two years' time. That business could easily be transferred to Journey.

A second possibility is that UAL will appoint Journey at one or more of its other hubs. And the third possibility is that other airlines will also appoint Journey. Given that revenue and profit from the Los Angeles operation alone are running at an annual rate of some £15m and £2m respectively, any developments along these lines would transform the prospects of a business currently valued at just £9m.

After lying low, Journey could emerge as an interesting penny share story in 2011. And I'll be keeping a close eye on its progress in the months ahead.

This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.