Approach JetBlue Airways Like a ‘Quant’

The math for JBLU stock is interesting but also very nuanced

When the novel coronavirus first began seriously disrupting the U.S. economy, the approach for airline companies was very simple: stay away! That was the case even if you were looking at discount specialists like JetBlue Airways (NASDAQ:JBLU). With travelers fearful of this dreaded virus, JBLU stock unsurprisingly tumbled into the abyss.

jetblue aircraft interior (jblu stock)
Source: Shutterstock

Unfortunately, the strategy for how to handle this embattled industry has only grown more complex. On one hand, the recovery narrative is a compelling one because at some point or another, we’ve got to get back to business. And given that JBLU stock is trading at a sharp discount relative to prior highs, the bullish thesis is also very tempting.

But on the other hand, resurgent cases of the coronavirus are wreaking havoc on JetBlue and its rivals. Multiple states, most notably Texas, have suffered not only a spike in new daily infections but also in hospitalizations. In response, many states have rolled back their reopening measures, leaving multiple investment sectors vulnerable to volatility.

Thus, it’s no coincidence that most airliner stocks, including Southwest Airlines (NYSE:LUV), United Airlines (NASDAQ:UAL) and Delta (NYSE:DAL) have printed near-identical looking technical charts. Prospective buyers want to know which player, if any, is worth booking.

Can JBLU Stock Rise Above the Muck?

Before we can answer the above question, it’s useful to lay out the fundamentals to which we can all agree. First, air travel demand has increased substantially from this year’s lows. That’s absolutely not in dispute.

According to passenger screening numbers from the Transportation Security Administration, air traveler volume reached its highest levels relative to the year-ago level for the holiday weekend. On July 2 and July 3, 1.483 million people flew the friendly skies, which was about 35% capacity compared to one year ago.

But we can also agree that unless travel volume increases from here on out, 35% capacity is not going to cut it. Logically, the airliners have become a game of musical chairs. Whichever organization features the best fundamentals will likely have a seat.

So far, so good. Further, some courageous analysts have suggested that JBLU stock will be one of those winners. Based on its exposure to mostly domestic flights, along with its leadership in the discount airfare space, JetBlue appears poised to outperform in this new normal.

As a narrative-driven thesis, this is a solid argument. But how does it stack up against the facts? This is where thinking like a quantitative analyst may help.

Using Data to Decipher JetBlue

To justify a position in a U.S.-based airliner, investors should consider the strength of the underlying market. Here, the case isn’t exactly a comforting one.

U.S. passenger volume vs global airline market
Click to Enlarge
Source: Chart by Josh Enomoto

While the number of Americans taking to the air has increased substantially following the Great Recession, as a percentage share of global passenger volume, we’re actually declining. For instance, in 2004, flights aboard U.S. airliners represented 35% of total global travel. In 2019, this metric dropped to 20.4%.

So, don’t believe the common story that the coronavirus was the sole reason for ruining the American air travel industry. Even without the pandemic, we’ve been losing market share in terms of the global airliner industry. This is one of the reasons why airplanes have been getting more cramped. It’s also the reason why individual players are desperate to cram their passengers in, social distancing be damned.

But because JetBlue mostly flies domestic routes, it has an advantage. Between 2017 and 2019, the delta – I’m talking about the mathematical change, not the airliner – of U.S. domestic flights as a share of the global industry is much more favorable than U.S.-based international flights: we’re talking -1.38% domestic versus -3.06% internationally.

U.S.-based domestic and international flights as a share of global air travel
Click to Enlarge
Source: Chart by Josh Enomoto

In other words, the domestic flyer is a comparatively more stable consumer base than the international one. If you were thinking about betting on airliners, JBLU stock makes sense on this metric alone.

Fundamental Factors to Consider

Does this mean you should go out and buy JetBlue shares? Unfortunately, it’s not that simple.

As a nearer-term wager, JBLU stock might make sense at the right price. Because of the resurgent coronavirus, corporations are incentivized to remain operating remotely. That means fewer opportunities for business travel, which isn’t exactly JetBlue’s forte. Again, this is a discount specialist.

But recall that the U.S. airliner industry has been losing ground. Several years ago, we represented over a third of all global travel. Now, we’re barely above one-fifth. Thus, if you want to make profits off airline stocks, the international space is where the real growth is.

That’s a different story for a different day. If we must only focus on U.S. airliners, then the big dogs like United or Delta probably offer better long-term bets. As the economy becomes more fractured as the wealth gap widens considerably, the companies that will win are those that can offer superior services.

Also, a worsening economy does no good for JBLU stock as its underlying consumers are generally price sensitive.

To summarize, JetBlue may offer traders upside in the near term. But that alone doesn’t change the terrible situation the industry finds itself in. Against a longer-term framework, the airline giants probably make the most sense. However, I’m only speaking in relative terms as this remains a troubled sector.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/approach-jetblue-airways-like-a-quant-jblu-stock/.

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