JetBlue (NASDAQ:JBLU) will announce its second quarter earnings Thursday, July 24. The low cost carrier is coming off a tough first quarter in which its profits declined due to weather-related flight disruptions. In the second quarter however, we anticipate JetBlue to post strong growth in its top line on gains from its capacity expansion. The carrier’s second quarter profits will likely also rise, as its strong top line growth and fuel efficiency gains from new airplanes will likely outweigh its rising employee salaries. All in all, JetBlue will likely post a solid second quarter.
Capacity Expansion & Gains From The Mint Service Will Lift Revenues
In the second quarter, JetBlue expanded its flying capacity by about 6% annually as the demand for flights in the domestic U.S. air travel market continued to rise.  This rate of increase in JetBlue’s flying capacity was the highest for any major U.S. airline, and highlights the carrier’s strategy of growing its market share. Higher capacity in the quarter increased JetBlue’s passenger traffic by over 5% annually. The carrier also anticipates its unit revenue (amount collected from each passenger for a seat per mile of flight) to rise by 6-7% annually in the second quarter.  Effectively, the higher passenger traffic and the higher unit revenue mean that JetBlue’s second quarter passenger revenues will rise significantly.
Additionally, we figure the growth in JetBlue’s second quarter unit revenue has been boosted by launch of its premium class service branded Mint. In mid-June, JetBlue launched this premium class service on its flights between New York and Los Angeles. This service includes 16 fully lie-flat beds, four of which are suites with privacy door. Flyers on this service also get access to 100 channels from DirecTV and on-board WiFi. JetBlue launched this service at a one-way fare of $599, which is much below premium class fares offered by its competitors on this route.  From the airline’s perspective, this premium class service will help lift its average fares, which are currently weighed down by economy class fares. So, through this premium class service JetBlue will likely be able to raise its average fare, yield and margin. At the same time, the Mint service will help diversify JetBlue’s passenger base, which is currently dominated by leisure travelers. Premium class service will bring business travelers to JetBlue, and this category of travelers are less susceptible to economic downturns than leisure travelers. So, the Mint service is not only increasing JetBlue’s average fare and yield, but also diversifying its traveler base. In the second quarter earnings, we will be noting the customer response to this new service. Later in the year, JetBlue plans to expand its Mint service to its New York-San Francisco flights. So, we figure the effect of this service on JetBlue’s unit revenue will likely increase as the year progresses.
Addition Of New Airplanes Will Likely Ease Pressure From Rising Salaries
JetBlue’s second quarter profits will receive a boost from addition of more cost efficient Airbus A321s to its fleet. During its last earnings presentation, the company said that the newly added Airbus A321s are 10-15% more cost efficient than its current fleet of Airbus A320s.  We figure the significantly higher fuel efficiency of the newly added A321s will help temper the growth in JetBlue’s operating costs. Additionally, JetBlue is installing curved extensions, called sharklets, on wing tips of its existing Airbus A320s. These sharklets by enhancing the lift that an airplane generates from its surrounding air is increasing the fuel efficiency of the carrier’s A320s.  We figure in the second quarter, cost savings from these fleet initiatives will outweigh the pressure that JetBlue is facing from its rising employee salaries. A few months back, JetBlue pilots voted to be represented by a union, Air Line Pilots Association. This development, in our view, could increase the growth in JetBlue’s salary costs over the long term. In the second quarter however, we anticipate that gains from higher fuel efficiency will likely offset higher salary costs, to support growth in JetBlue’s profits.Notes:
- JetBlue’s Investor Update on April 24, April 24 2014, www.jetblue.com [↩]
- JetBlue’s May passenger traffic, July 23 2014, www.jetblue.com [↩]
- JetBlue’s Premium Transcontinental Service Mint Takes Off, June 15 2014, www.jetblue.com [↩]
- JetBlue’s 2014 Q1 earnings transcript, April 24 2014, www.jetblue.com [↩] [↩]