In the cut-throat, thin-margin airline business, JetBlue (JBLU) CEO Dave Barger has crafted a somewhat original identity for his company: part-legacy airline, part-low-cost carrier.
Now, recent changes to JBLU’s fleet and amenities are aimed at revving up the carrier’s hybrid strategy — and if all goes well, the airline’s stock could be poised to soar.
JetBlue’s business model is a hybrid that Barger calls “value.” Although JBLU retains its identity as a low-cost carrier, its hubs and interline agreements (which allow passengers to book flight segments and transfer baggage among multiple airlines) appear more legacy and less budget these days. JBLU traditionally has catered to leisure travelers, but it increasingly is staking a claim in premium business markets like Boston’s Logan and New York’s JFK.
Now, JetBlue does face a few headwinds. For one, JBLU’s hybrid model faces fierce competition from traditional legacy hub-and-spoke airlines like United Continental (UAL), Delta (DAL), American (AAMRQ) and US Airways (LCC). Although low-cost leader Southwest (LUV) has moved away from that model in recent years — and looks even more legacy after its AirTran acquisition — budget carriers like Spirit (SAVE) remain in the mix.
And JBLU has had some challenges of late: Q2 earnings fell by more than 31% and missed Wall Street expectations, and a top line of $1.34 billion just skated under the bar, too. Higher maintenance costs contributed to slimmer margins, driving operating margin from 10.2% to 7.6% in the second quarter.
But for several reasons — namely, these three — JBLU still looks ready to soar:
- JetBlue Could Be A Takeover Target: The Justice Department’s bid to delay an antitrust trial on the proposed $11 billion merger of US Airways and American until March 2014 could boost JetBlue’s fortunes by making it an attractive takeover target.US Airways CEO Doug Parker has often said that there is only one major airline merger left in the United States, and that US Airways would be part of it. Until a couple of weeks ago, he thought he’d be exchanging vows with American, but if the DOJ continues to hold its ground and the parties can’t settle, JBLU could be an attractive consolation prize. An LCC-JBLU merger would have a powerhouse presence on the East Coast. At a little more than $6 a share, JBLU is trading at about 10 times forward earnings and has a price to earnings growth ratio of just 0.63, indicating it’s undervalued.
- Likelihood of More Valuable Takeoff-Landing Slots: If American and US Air do manage to reach a deal with DOJ and merge, that deal will certainly include the auction of some of the airlines’ valuable flight slots at Washington D.C.’s Reagan National. JetBlue was so hungry for slots at that airport two years ago that it ponied up a whopping $40 million to win eight takeoff/landing slot pairs at auction.
- Premium Travel and New Amenities: JBLU announced in August that it would launch a premium class — for the first time in the airline’s history — on some transcontinental flights with new Airbus A321s. The premium class will sport new lie-flat seats on New York-to-Los Angeles and New York-to-San Francisco routes beginning in Q2 2014. In partnership with ViaSat (VSAT), JBLU’s Live TV unit will launch its wireless broadband Internet access — dubbed “Fly-Fi” — by the end of the year.
Although JetBlue’s hybrid business model looks challenging in the current operating cost and fare environment, the airline has had some good news to crow about lately: July passenger volume rose by more than 7%, and revenue per seat — the industry’s all-important measure of profitability — edged up 5% from the same month last year. High marks for customer service, a new premium fare strategy and expanded ancillary offerings have the potential to boost margins.
DOJ’s antitrust suit to block the American-US Air merger looms large for all U.S. airlines. But regardless of what happens, JBLU stands to gain in some way — whether by picking up additional slots at a prime East Coast airport or in a potential alliance with another airline. While JetBlue could be on American’s radar if its deal with LCC is nixed, US Air would be my first bet on winning the value carrier’s hand if takeover rumors gain legs.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.