JetBlue Is Worth $9.10 On Its Low-Cost Advantage & High-Value Geographies

JetBlue Airways (NASDAQ:JBLU) has grown strongly through the last decade to become the fifth-largest airline in the U.S. based on passenger traffic. We figure the carrier’s low-cost structure, which allows it to profitably charge low fares, has played a key role in its rapid expansion. Additionally, the carrier’s focus on high-value geographies including New York, Boston, Los Angeles, and the Caribbean among others will likely enable it to continue to grow its results in the coming years.

In recent years, as legacy carriers such as American (NASDAQ:AAL), United (NYSE:UAL) and Delta (NYSE:DAL) have lowered their cost structures through restructurings during bankruptcy periods, the cost advantage enjoyed by JetBlue has diminished. In order to strengthen its historic low-cost advantage, JetBlue in recent months has taken many steps to lower its costs further. The carrier is inducting more fuel efficient airplanes, and we figure this initiative will help save fuel costs for the carrier and will also work to offset the pressure that JetBlue is facing from its rising employee costs, which constitute nearly a quarter of its total operating costs. Recently, the carrier’s pilots voted to be represented by a union, Air Line Pilots Association, and we figure this could further raise the pressure from employee costs on JetBlue.

Separately, JetBlue’s focus on expanding in high-value geographies such as Boston and the Caribbean bodes well for its future, as these markets will likely continue to grow at strong rates for the foreseeable future. We currently have a stock price estimate of $9.10 for JetBlue, approximately in line with its current market price.

See our complete analysis of JetBlue here

JetBlue Is Taking Initiatives To Maintain Its Cost Advantage

JetBlue designed its business model around a low-cost operating structure. Accordingly, the carrier operates a predominantly point-to-point flight network rather than a hub-and-spoke network which legacy carriers such as Delta, American and United have. In turn, low operating costs enable the carrier to price its fares lower than many other carriers, which attracts passengers. Consequently over the years, JetBlue has eaten into the market shares of many of its competitors.

Currently, the carrier is adding flying capacity at a solid rate of around 5% per year, which is much higher than the rate at which most other carriers including Southwest (NYSE:LUV) are adding capacity. However, for JetBlue to continue to expand at such strong rates, it is crucial that it maintains its low-cost advantage relative to legacy carriers. It is hence inducting the more fuel efficient Airbus A321 into its fleet. During its first quarter earnings presentation, JetBlue said that the newly added Airbus A321s are 10-15% more cost efficient than its current fleet of Airbus A320s. Additionally, the carrier is also installing curved wing extensions called sharklets on its existing Airbus A320s, which helps provide a further 3-4% improvement in fuel efficiency on long haul transcontinental routes. ^[1] We figure these measures will help lower JetBlue’s fuel costs, which currently constitute around 35% of its total operating costs. Overall, these fleet initiatives by lowering costs will expand JetBlue’s operating margin in the coming years.

JetBlue Is Also Seeking To Grow Its Revenues To Expand Its Margins

Apart from these cost saving initiatives, JetBlue is also taking some revenue initiatives to expand its margins. The carrier is focusing on growing the share of business travelers in its overall passenger traffic. Currently, leisure travelers who are highly susceptible to economic downturns constitute a significant share of JetBlue’s overall passenger traffic. To expand into business class travel market, the carrier is starting premium class service branded Mint. This service from the carrier will include 16 fully lie-flat beds, four of which will be suites with privacy door. Flyers on this service will also have access to 100 channels from DirecTV and on-board WiFi. JetBlue will launch this service next month on its flights between New York and Los Angeles. And, by the end of this year, it will expand to include this service on its flights between New York and San Francisco. We figure this premium class service will attract business travelers to JetBlue on these transcontinental routes, which have a high share of business travelers. In turn, this will grow JetBlue’s overall passenger revenues as these premium seats will be priced around 2-3 times the economy seats.

In all, higher margins driven by these cost and revenue initiatives will provide JetBlue with more room to drive down its fares profitably. And thus, continue with its strategy of taking market share from other carriers through its lower priced flights.

Strong Presence In High-Value Geographies Will Benefit JetBlue In The Long Term

Separately, JetBlue’s strong presence in high-value geographies such as New York and Boston will make sure that it will benefit from the growth in passenger traffic that is expected in these markets. Last year, JetBlue’s domestic service accounted for nearly 31% of all domestic passengers at New York’s John F Kennedy (JFK) Airport. ^[2] The carrier also has a strong presence at New York’s LaGuardia Airport and New Jersey’s Newark Liberty International Airport. JetBlue is also the largest carrier in terms of flights and seats offered at Boston’s Logan International Airport. In 2013, it accounted for more than 30% of all Boston passengers. ^[2] Apart from a strong hold in these two major air travel markets, JetBlue also has a strong presence in Los Angeles, Orlando and Fort Lauderdale. It is also expanding on routes connecting destinations in the Caribbean and Latin America. We expect the carrier’s significant presence in these crucial air travel markets to enable it to continue to grow in the coming years.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

1. JetBlue’s 2014 Q1 earnings transcript, April 24 2014, www.jetblue.com [↩]
2. JetBlue’s 2013 10-K, February 19 2014, www.jetblue.com [↩] [↩]