Shares of the country’s second largest discount carrier JetBlue Airways Corporation (NASDAQ:JBLU) have been on a tear since the start of 2014, with JBLU stock nearly doubling last year and tacking on another 20% for the year to date.
Yes, the airline sector in general has performed exceptionally well over the last 12 months, but JetBlue’s gains top those of competitors Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co (NYSE:LUV), United Continental Holdings Inc (NYSE:UAL) and Alaska Air Group, Inc. (NYSE:ALK). The air travel sector has been benefiting from a number of favorable economic tailwinds, chief among them prevailing low oil prices.
JetBlue’s story has, however, not always been so rosy. Shares of the company have lagged the sector by quite a wide margin over the long term, as evidenced by its five-year gain of “only” 251% versus a 362% average for the industry. JBLU has been lagging its peers due an apparent inability by the company to control its ballooning operational costs.
What is fueling the current turnaround, and can it be sustained?
Asleep at the Switch?
JetBlue’s management has frequently been accused of falling asleep at the switch. JBLU has generally fared worse than its peers when it came to controlling its costs and boosting its top line through ancillary revenue.
JetBlue’s core value proposition comes from its positioning as a low-cost carrier, something it shares with Southwest Airline and ultra-low cost carrier Spirit Airlines Incorporated (NASDAQ:SAVE). But JBLU has not been particularly successful at controlling its costs.
For instance, company’s cost per available seat mile (CASM) rose by 4.6% in the first three quarters of 2014, compared to 2% CAGR for Southwest Airlines and 1% for Delta. Airlines have generally been trying to lower their unit costs, and JetBlue’s cost to fly a seat mile has been trending poorly compared to its peers.
Full-service airlines such as Delta and United have managed to close the cost gap between them and discount carriers such as Delta and Southwest, which has diluted the airlines’ value proposition. Meanwhile, Delta has been introducing ultra-cheap no-perk fares in markets where the company competes head-on with Spirit.
Healthy Revenue Trends
JBLU did some impressive financial engineering in 2014 that helped to return it to investors’ good books.
The company managed to repay $778 million of its debt, effectively cutting its debt load by about 14% to $2.23 billion and lowering its leverage by about 8%. The company was able to partly finance the debt pay-down through proceeds of the sale of its LiveTV subsidiary to France’s Thales for $400 million. JetBlue’s debt-to-capital ratio now stands at 47%, which is considerably lower than the 70% reading by United Continental and American Airlines Group (NASDAQ:AAL).
JBLU is trying to gradually transition from a pure leisure-oriented carrier to a hybrid leisure/business carrier. JetBlue introduced “Mint,” an alternative to traditional first class, in October last year. Mint is a one-way fare between Los Angeles and Manhattan that costs just $599, considerably lower than what larger carriers charge. JBLU had earlier noted that JFK-San Francisco and JFK-Los Angeles routes charge a 50% premium compared to other domestic routes due to an abundance of premium passengers. This is a new revenue opportunity for the company.
The strong U.S. economy has been giving a major boost to airlines in general, and JBLU has not been left behind. The airline reported an industry-best 10% jump in revenue passenger miles (RPMs) to 2.9 billion in February, while its available seat miles (ASMs) improved 7.4% to 3.47 billion. Premier carriers such as Delta and American Airlines reported weaker numbers.
And of course, low oil has provided an unexpected boon to airlines. Oil expenses — which account for roughly one-third of the overall operation expenses for major airlines — have been cut by more than half since the beginning of 2014 and currently stand at a 10-year low of around $41 per barrel. JetBlue’s fuel expenses during the last quarter were 12.7% lower than the previous year’s comparable quarter, and JBLU expects the cost savings to continue in the current year and trickle to its bottom line.
Bottom Line
JetBlue’s operational performance has improved considerably due to favorable mix of cost restructuring and industry tailwinds. While it’s still too early to say that JBLU has earned its stripes as the best carrier, it’s fair to say that JetBlue stock will fully merit the title should it continue on its current path for a few more years.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
