JetBlue Airways (NASDAQ:JBLU) is one company that deserves to be in the investment radar. After a sharp plunge during the coronavirus driven market meltdown, JBLU stock has been in a consolidation zone, likely to trend higher in coming quarters.
In a recent interview, Boeing (NYSE:BA) CEO Dave Calhoun opined that air traffic levels could reach 25% by September 2020. Further, towards the end of fiscal year 2020, air traffic might increase to 50%.
If this dire prediction holds true, the airline industry is set for slow recovery with an extended period of cash burn. Therefore, balance sheet and liquidity buffer become a key consideration when looking for opportunities in the sector.
Robust Liquidity of JBLU Stock
Starting with liquidity, JetBlue Airways reported a total buffer of $3.1 billion as of April 2020. In addition, the company’s adjusted debt-to-capitalization-ratio for the first quarter of 2020 was 44%. This gives ample headroom to leverage for survival in the coming quarters. This combination of strong liquidity buffer and low leverage is just the first reason to be positive on JBLU stock.
Another key point is that the airline was burning $18 million per day in cash as of March 2020. In May 2020 and beyond, the company expects cash burn to decline to $10 million per day. This would imply a quarterly cash burn of $900 million. With the current liquidity buffer, the company could weather several quarters of crisis.
The company is also looking at additional capital raising through secured debt and sale leaseback. Additional liquidity will position JetBlue Airways for survival well into FY2021.
JetBlue Airways in Comparison to Peers
I believe that JetBlue Airways and peer Southwest Airlines (NYSE:LUV) are best positioned from a balance sheet perspective.
As of Q1 2020, Southwest Airlines reported debt-to-capitalization of 36% as compared to 44% for JetBlue Airways. On the other hand, United Airlines (NASDAQ:UAL) reported the same metric at 65%. For American Airlines (NASDAQ:AAL), things look worse with a debt of $25 billion and the balance sheet having stockholders’ deficit.
I mentioned earlier that JetBlue Airways is expecting to burn $10 million in cash per day. That might sound like a lot, but you have to put that number in perspective: Delta Airlines (NYSE:DAL) expects cash burn of $50 million per day from May 2020.
Even United Airlines expects a cash burn of $45 to $50 million per day. Of course, JetBlue Airways is a smaller company. However, my focus is on cash preservation and balance sheet.
From a credit perspective, JetBlue Airways is attractive. If the crisis goes on for an extended period, American Airlines and United Airlines will witness higher credit stress.
Another stock that deserves mention here is Alaska Air (NYSE:ALK). The company is targeting a monthly cash burn rate of $200 million by June 2020. This would imply a daily cash burn in the zone of $6 to $7 million. Clearly, it seems that smaller airline companies are better positioned to navigate the crisis.
Circling back to the company’s financial flexibility, adjusted debt as of Q1 2020 was $3.4 billion. For the same period, the company’s book value of flight equipment’s was $10.5 billion. This implies a loan-to-value of 32%.
While the company has not specified the amount of unencumbered assets, the LTV does indicate ample scope for leveraging.
My Concluding Thoughts on JBLU Stock
In the recent past, JetBlue Airways has ramped up its liquidity position and reduced near-term capital expenditure. In addition, operating expenses have declined sharply. These measures are likely to help the company navigate the crisis.
From an industry perspective, as states reopen their economies, there will be some increase in bookings. This will be positive for JBLU stock, which has been in a consolidation zone.
On the flipside, Dr Anthony Fauci has warned of renewed surge in infections if the economy reopens too soon. Any such event would naturally delay the recovery for the airline industry.
However, JBLU stock is still lower by 62% from it’s 52-week highs of $21.65. Considering the company’s credit health, I expect the stock to remain firm and potentially trend higher.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
