Demand for flights hasn’t recovered as quickly as I thought it would back in April and May. Nonetheless, demand for airplane tickets has climbed tremendously, a vaccine is almost definitely on the way and airlines’ cash burn rate is dropping quickly. All of that bodes very well for the long-term outlook of JetBlue Airways (NASDAQ:JBLU) stock.
Although airline revenues haven’t bounced back to 60%-70% of 2019 levels, as I had previously predicted, ticket sales have surged since they bottomed in April.
Delta (NYSE:DAL) recently estimated that its third-quarter revenue would be 20%-25% of the levels it reported in Q3 of 2019. That’s way above the 95%+ year-over-year declines that the company was seeing in mid-April. And Delta generates 50% of its revenue from business travelers, while JetBlue is less leveraged to those road warriors. Since leisure travel has recovered much more quickly than the business sector, JetBlue’s revenue this quarter will probably be only 35%-40% of the amount it generated in Q3 of 2019.
Moving to Take Market Share
Another good sign for JetBlue is that the company is making some aggressive moves to try to increase its market share and revenue. Specifically, the company announced on July 2 that it would add 30 new routes in the U.S., and it recently announced a new alliance with American Airlines (NASDAQ:AAL). Under the deal, the two airlines “will feed each other passengers on select flights to and from the Northeast.” In general, companies that are in huge trouble and doing very poorly do not look to expand their operations.
And as InvestorPlace contributor Bret Kenwell recently pointed out, Delta’s been able to slash its cash burn rate, paring its daily cash burn rate in June to $27 million versus $43 million in all of Q2. The airline’s said that it’s looking to get that down to zero by the end of the year.
Outlook for JetBlue and Other Airlines
Any rebound in demand for flights was grounded with the recent increase in daily new novel coronavirus cases in several states, amplified by the media’s hype of the issue. Also hurting ticket sales was the decision by the governors of New York, New Jersey and Connecticut to require travelers coming to their states from the “hotspots” to quarantine for two weeks.
But the surge of cases, for the most part, appears to be leveling off and, with the exception of a few states, has not been accompanied by a large increase in daily death totals. Moreover, those states’ daily death totals remain far below the levels of New York and New Jersey during the spring, and the case fatality rates remain well below those seen in the spring.
Therefore, I do not expect Americans’ fear levels to skyrocket to the levels they had reached on April and May which pushed airline revenue off a cliff again. And, since the shutdowns caused huge amounts of problems and there’s no strong evidence that they reduced death rates, I don’t expect most governors to ever reimpose them.
Meanwhile, JetBlue’s balance sheet is strong, as its $3 billion of cash is equal to more than 40% of its 2019 expenses. Taken together, cost cutting, JetBlue’s cash and the demand rebound ensure that the carrier will remain in a strong position until a vaccine is ready.
And speaking of a vaccine, with multiple drug companies announcing that their vaccine candidates have been effective in trials, I’m all but certain that a highly successful vaccine will be introduced within the next six months. Additionally, Dr. Anthony Fauci recently said that a vaccine would be introduced by the end of the year.
As I’ve written previously, I don’t understand the logic of those who say that air travel will remain far below 2019 levels even after a successful vaccine is introduced. While economic problems could conceivably prevent some consumers from flying much after a vaccine is distributed, I think pent-up demand from middle- and high-income Americans will more than offset that negative factor.
Bottom Line on JBLU Stock
Demand for flying has rebounded and is unlikely to fall meaningfully, while JetBlue has a strong balance sheet. As a result, the carrier, in all likelihood, will be able to remain intact and strong until a vaccine is introduced. A vaccine, in turn, will cause demand to surge a great deal, lifting JBLU stock in the process. Consequently, I recommend that long-term investors buy the shares.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has written articles about U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful, contrarian picks have been Roku, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.