"I don't want to be seen as a turn round guy but I do turn things around."
These confident words were echoed by Stephen Yapp, the chairman of the latest company I paid a visit to this week. It certainly did sum up his achievement since taking the reins of Journey Group (AIM: JNY) back in 2007. It was a mess back then, but today, Journey is flourishing and Yapp has laid the foundation for some real excitement over the next few years. I went to sit in with Yapp and his highly experienced finance director Carl Fry at Journey's modest office in Heston.
If you're not quite sure what Journey does and who its customers are, let me tell you a little bit about them.
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Journey has had a tough time, not only because it has to sort out the mess left behind by the previous management, but also because it is serving the airline industry, which itself has had a tough time even by its own miserable standards.
The cataclysmic journey of the airline industry
You would have to hold a gun to my head to make me invest in an airline. The industry has lost money in seven of the last ten years. This loss has inevitably put the squeeze on customers and suppliers alike. Gone are the complimentary drinks, the obligatory meal thrust upon you on even the shortest of flights, the goody bags and the free newspapers. Short of asking passengers to stand and even that idea has been mooted - there is not much the airlines can do to make the flying experience even more spartan.
But standards have not been lost altogether. There is still a cabin service, the online crew do still wheel the trolley up the aisle and that means that there is still a business for Journey.
How to make the most from what you've got
It has two divisions, products' and US. Journey is responsible for supplying goody bags, audio headsets and cosmetics to airlines including British Airways and Virgin.
Journey was also successful in securing a contract last year with Delta Airlines. It now supplies the meal tray used to store the on-board meals, along with cutlery, salt and pepper, glasses and cups.
This followed a decision by Delta to dispense with its own branded products and open it up to third party design. Journey won this contract and now sources millions of items from the Far East, and supplies them to 160 Delta depots all over the world.
With this knowledge of the supply chain, Journey raised its ambitions to hotels and cruise ships and won its first contracts with TUI, Thomson and Prestige Cruises last year. However, the real game changer for the business was the award of a meal contract with United Airlines (UAL). In 2008, UAL appointed Journey to supply meals for all of its flights from Los Angeles.
At a cost of £9.5m, Journey built a 53,000 square foot facility that you might imagine is full of chefs whisking up chicken supreme and beef casserole. In fact, no cooking actually takes place there at all. The food is brought in from third party suppliers, assembled on to trays by Journey, and then delivered to the aeroplane. This might sound like a strange way of doing things, but Yapp is certain that it is far more efficient than the method of its competitors and has cut 15% off United's meal costs.
A seemingly perfect low cost model
UAL seems to like Journey and has given it some of the many awards that Americans seem to love. Best domestic meal score hub kitchen' and best international caterer recognition program' are evidence that Journey is providing a better service than its competitors, such as Gate Gourmet and LSG Skychefs.
Journey's patent protected business model is simple. It simply charges to deliver meals per flight, regardless of how many passengers are on board. Unlike its rivals, it does not attempt to make a profit on the food preparation and the business model gives UAL better control over menus and ingredients.
With a flexible labour force that can easily be adjusted to meet the demands of the moment, Journey's model seems to be both low-cost and agreeable to UAL. And this brings us to the all-important questions. Is the UAL, Los Angeles deal a one-off? Will UAL appoint Journey to provide the meals at some of its other hubs? Or will other airlines adopt the model?
This year we should get some idea of UAL's thinking, thanks to its 2010 merger with Continental.
While Journey supplies the UAL flights out of LA, the former Continental flights use a different supplier. However, the latter contract is up for renewal this year and there are obvious reasons why it may be switched to Journey's low cost model. That would transform Journey's profitability and its share price could, well take off. I'll be keeping a close eye on this one.
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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.
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