by Susan J. Aluise | August 30, 2013 7:39 am
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:
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.
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