Capacity Expansion Propels JetBlue And Southwest’s Results Higher

JetBlue‘s (NASDAQ:JBLU) revenues rose by 10% annually to $1.4 billion in the third quarter on higher passenger traffic driven by capacity expansion and higher passenger fares supported by a stable demand environment for flights. Additionally, unlike the first half of this year, in the third quarter, gains from higher passenger traffic and higher fares offset the negative impact from rising maintenance costs to lift the carrier’s profits by 58% annually to $71 million. ((JetBlue’s 2013 Q3 earnings, October 29 2013, www.jetblue.com))

We currently have a stock price estimate of $7.20 for JetBlue, approximately in line with its current market price. We are in the process of incorporating the carrier’s third quarter earnings and shall update our analysis shortly.

See our complete analysis of JetBlue here

Top Line Rises On Gains From Capacity Expansion

In the third quarter, JetBlue continued with its strategy of raising flying capacity to drive growth in its passenger traffic and revenues. Overall, the carrier raised its flying capacity by 5.1% annually in the third quarter with a focus in the Boston, Fort Lauderdale and Caribbean markets. This lifted its passenger traffic by 5.4% annually. Gains from higher passenger traffic were aided by higher passenger fares driven by a stable demand environment. Higher passenger traffic and higher fares in turn lifted JetBlue’s top line by $138 million or 10% annually. ^[1]

Top Line Growth More Than Offsets Rising Maintenance Costs

This strong top line growth more than offset a 28% year-over-year hike in the carrier’s maintenance and repair costs to lift profits ^[1]. JetBlue, which operates the youngest aircraft fleet among all major U.S. airlines is seeing its maintenance costs rise sharply as with age its aircraft are requiring more frequent and heavier maintenance checks. However, the rate of growth in these costs has steadily come down in the first three quarters of this year, and we anticipate it to moderate further in the coming quarters.

Looking ahead, JetBlue plans to continue to raise its flying capacity to drive growth in its passenger traffic and top line.

Southwest’s Earnings

Separately, Southwest‘s (NYSE:LUV) top line rose by 6% annually to $4.5 billion and its profits rose to $259 million in the third quarter, from $16 million in the prior year period, driven by higher passenger fares. The carrier raised its third quarter flying capacity by 1% annually, but its passenger traffic fell marginally on a year-over-year basis. However, the impact from lower passenger traffic was more than offset by 11% growth in its average passenger fare which lifted top line results. The carrier’s profits also benefited from lower AirTran acquisition and integration costs, which fell to $28 million in the third quarter, from $145 million in the same period last year. ^[2]

See our complete analysis of Southwest here. We are also in the process of incorporating Southwest’s third quarter earnings and shall update our analysis shortly.

AirTran Integration And International Expansion On Track

In the third quarter, Southwest continued to integrate AirTran and expects full year 2013 synergies from the integration of $400 million. The carrier also leased out the first of AirTran’s 88 Boeing 717-200s to Delta (NYSE:DAL) during the quarter and removed 11 more from active service in preparation of their transfer to Delta. Southwest plans to transfer all of AirTran’s 88 717s to Delta over the next couple of years as it seeks to maintain the advantages that come with the operation of a single aircraft type. Southwest operates an all Boeing 737 fleet apart from these 717s which it got as a result of the AirTran acquisition.

Additionally, in its earnings release, Southwest confirmed that its plans to add international routes in 2014 were on track. The carrier said that last month it also started work on its first international terminal, Houston’s William P. Hobby Airport, which is expected to start operations in 2015. This terminal will allow Southwest to start operations on many routes connecting destinations in Latin America and the Caribbean. We figure international expansion in these marekts will help drive long term growth in Southwest’s results as demand for flights in these markets is expected to continue to grow strongly for many years to come.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. JetBlue’s 2013 Q3 earnings, October 29 2013, www.jetblue.com [↩] [↩]
2. Southwest’s 2013 Q3 earnings results, October 24 2013, www.swamedia.com [↩]