Southwest Airlines Co (LUV) and JetBlue Airways Corporation (JBLU) are two well-known names in the low-cost category of the U.S. airline space. However, the stocks seem to be performing quite differently in the current scenario. This is clearly evidenced by Southwest Airlines’ Zacks Rank #2 (Buy) and JetBlue’s Zacks Rank #4 (Sell).
Let’s delve into details to find out why this is the case.
Recent Earnings Performances Compared
It is a well-documented fact that a company’s quarterly results are often the driving force behind the health of the stock. In the recently concluded fourth-quarter 2016 earnings season Southwest Airlines and JetBlue Airways displayed vastly different performances. Both companies reported their results on Jan 26.
Southwest Airlines reported impressive results for the fourth quarter. The company beat earnings estimates and delivered better-than-expected revenues. Revenues also increased 2% on a year-over-year basis.
On the other hand, JetBlue delivered mixed results in the quarter. While earnings per share beat the Zacks Consensus by a penny, revenues lagged expectations.
The bottom line, however, contracted significantly on a year-over-year basis due to higher costs.
Disappointing RASM at JetBlue
The JetBlue stock lost value following the earnings release, mainly due to the lackluster operating revenue per available seat mile (RASM: a key measure of unit revenues) for January. At that time, JetBlue had predicted a decline in RASM in the band of 8–9% in January.
Moving ahead, the metric actually declined approximately 8.5% year over year in January. Holiday placement hurt the metric to the tune of approximately five points. Also, winter storm Jonas contributed to the significant decrease in RASM for the month.
While the JetBlue stock continued to struggle after the fourth-quarter earnings release, the Southwest Airlines stock has flourished. Shares of Long Island City, NY-based, JetBlue depreciated 8.7% since Jan 26, while the Dallas-based Southwest Airlines stock gained 5.4% in the same time span.
A comparison with the Zacks categorized Transportation – Airline industry also shows Southwest Airlines is favorably placed as its shares have outperformed the industry’s increase of 1.2% in the above period.
JetBlue, on the other hand, disappointed investors.
Other Metrics to Consider
Southwest Airlines also boasts a higher return on equity (ROE) of 29.8% for the trailing 12-month period than JetBlue’s 20.1%. This indicates that Southwest Airlines is more efficient than JetBlue in using shareholders’ funds. We note that Southwest Airlines is a dividend paying stock unlike JetBlue.
Moreover, the expected earnings per share growth rate (3–5 years) for Southwest Airlines currently stands at an attractive 9.2% compared with JetBlue’s 3.6%. Moreover, Southwest Airlines’ PEG ratio of 1.6 is lower than JetBlue’s 3.02.
Additionally, Southwest Airlines’ market capitalizations of $35 billion is much higher than JetBlue’s $6.5 billion. Southwest Airlines’ larger business size than JetBlue better arms it to weather the industry headwinds.
Going by the above arguments, it can safely be said that Southwest Airlines is better placed than JetBlue in the low-cost segment of the U.S. airline space.
We note that the success of low cost carriers like Southwest Airlines and Spirit Airlines Incorporated (SAVE) have raised concerns for legacy carriers like American Airlines Group Inc (AAL) and United Continental Holdings Inc (UAL).
In a bid to combat the threat of low-cost carriers and attract budget-conscious travelers both the above- mentioned legacy carriers have recently started to sell cheaper tickets (Basic Economy Fares).
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