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Investment Overview for JetBlue Airways (NASDAQ:JBLU)
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Below are key drivers of JetBlue Airways that present opportunities for upside or downside to the current Trefis price estimate.
JetBlue Airways US
- JetBlue US Passenger Yield: JetBlue US Passenger Yield has increased from $0.108 in 2008 to $0.118 in 2012, due to a rise in fuel prices and other costs for the airline that forced it to raise its fares. We expect this to increase to $0.14 by the end of the Trefis forecast period. However, if this figure increases to $0.15 instead then there could be a potential upside of 5% to the ${trefisprice}. If, however due to competitive pressure, the figure declines to $0.13 by the end of the Trefis forecast period, then there could be a potential downside of 5% to the ${trefisprice}.
JetBlue Airways International
- JetBlue International Passenger Yield: JetBlue's International Passenger Yield decreased from $0.24 in 2008 to $0.20 in 2009 before rebounding to $0.225 in 2012 as a result of airlines passing higher fuel prices to passengers. We expect this figure to increase to $0.26 by the end of the Trefis forecast period. If however, this increases to $0.28 due to stronger economic activity and constant pressure from fuel prices then there could be a potential upside of approximately 5% to the ${trefisprice}. If however due to competitive pressures, this increases to only $0.24 then there could be a potential downside of around 5% to the Trefis price estimate of JetBlue's stock.
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JetBlue Airways is the 6th largest passenger carrier in the United States based on revenue passenger miles as reported by airlines. JetBlue operates on point-to-point routes with its fleet of 120 Airbus A320 and 49 EMBRAER 190 aircrafts. This represents the youngest and most fuel-efficient fleet of any major U.S. airline.
JetBlue operates mainly at the Newark International Airport and at New York's John F. Kennedy International Airport, both of which are one of the busiest domestic airports in the US. JetBlue commands around 40% of all airport traffic at New York's John F. Kennedy International Airport.
JetBlue Airways has been recognized as a "value airline" based on its service, style, and cost structure. Known for its award winning customer service and free TV as much as for its competitive fares, JetBlue believes it offers its customers the best coach products in markets it serves with a strong core product and reasonably priced optional upgrades.
As of December 31, 2012, JetBlue served around 70 destinations in 22 states, Puerto Rico, Mexico, and 12 countries in the Caribbean and Latin America. Most of its flights originate or have as a destination point key cities in the US including Boston, Fort Lauderdale, Los Angeles/Long Beach, New York/JFK, or Orlando. By the end of 2011, the firm operated an average of 700 daily flights.
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The US segment is the most valuable to the company because of the following reasons.
Higher operating margin than US segment
JetBlue Airways international passenger operations are producing higher margins than the domestic operations, driven by the profitable Caribbean expansion. The Caribbean region continues to benefit from the balance of visiting friends and relatives or VFR traffic as well as leisure-driven demand, which has helped JetBlue better manage the seasonality of business and improve overall revenues. Since the Caribbean markets are expected to mature to profitability very quickly, these will increasingly contribute to the margins and revenue growth for the airline.
Higher passenger yield in international segment than in domestic flights
JetBlue Airways' international operations have historically had yields on an average nearly twice that of its US segment. In the airlines business higher yields have a very high impact on the revenues and profitability of a division.
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Rise in oil prices significantly impact JetBlue's bottom line
Fuel expenses represent the largest single costs faced by airlines and account for over 30% of their total costs. Thus, increase in prices of fuel impacts the bottom line of carriers severely. Also, focus on keeping prices competitive in the airline industry prevents airlines including, JetBlue from immediately passing on price increases to their customers, so JetBlue's expenses are heavily impacted by fuel price increases.
Weak macroeconomic conditions
The main challenge the global airline industry faces during 2012 and beyond is the state of the global economy. Europe’s sovereign debt crisis has created enormous uncertainty and is expected to impact the overall profitability of the sector. Tony Tyler, IATA’s director general believes that a failure on the part of governments to resolve Europe’s issues could lead to a loss of $8 billion in 2012 for the airline industry. As a result IATA has already downgraded its 2012 outlook for profitability to $3.5 billion from the $4.9 billion that was expected a few months ago.
According to IATA’s latest forecasts; North American carriers are expected to earn about $1.7 billion; Asia Pacific carriers about $2.1 billion; African airlines are expected to lose $100 million and European airlines are projected to take a loss of $600 million due to economic uncertainty and higher passenger taxes.
Growth in ancillary revenues
With profitability declining for the overall airline sector, many of the carriers are figuring out ways to improve income by increasing ancillary forms of revenues. Baggage fees have been one of the main drivers of profitability for many airlines. Airlines are adding various new features to help boost revenues such as WiFi, in-flight entertainment, and improvements in lounge facilities.
According to a recent Amadeus/IdeaWorks study, North American airlines collectively produce the largest stream of ancillary revenues compared to other regions, with an estimated $15 billion in revenue in 2011. This represents a 70% jump over 2010, with the majority of the increases attributable to stronger merchandising efforts by the carriers as well as the addition of more à la carte services for sale.
Growing preference for low-cost carrier model
During the past decade, low cost carriers have gained a lot of prominence in the overall airline industry. Their total market share in the US on the basis of Revenue Passenger Mile (RPM) has been continuously rising over the past several years, as passenger demand is highly price sensitive. Over the coming years, we anticipate this trend to continue with low cost carriers continuing to increase their market share in markets across geographies.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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