JetBlue Aims To Retain Its Cost Advantage With Addition Of New Airbus A321s

Over the last many years, JetBlue Airways (NASDAQ:JBLU) has relied on its lower cost structure vis-a-vis network carriers including American (NASDAQ:AAL), United (NYSE:UAL) and Delta (NYSE:DAL), to grow its market share. JetBlue designed its business model in such a way that its operating costs remained low. Accordingly, the carrier operates a predominantly point-to-point flight network rather than a hub-and-spoke network that network carriers follow. Lower operating costs in turn have enabled JetBlue to price its fares lower than the fares offered by network carriers, consequently attracting passengers. Over the years, JetBlue has managed to win some market shares of the many network carriers.

However in recent years, the three major network carriers, namely American, United and Delta have lowered their operating costs through restructuring enabled by bankruptcy. As a result, the cost advantage enjoyed by JetBlue has shrunk. We figure it is essential for JetBlue to maintain its cost advantage vis-a-vis network carriers if it wants to continue growing its market share. Knowing the scenario, JetBlue is adding more cost efficient airplanes – Airbus A321s – to its fleet and installing curved extensions on wing tips of its existing Airbus A320s. These curved extensions called sharklets, improve fuel efficiency of JetBlue’s airplanes by improving the lift that the airplane generate from surrounding air. In our view, these measures aimed at improving cost efficiency of JetBlue’s fleet will help the carrier maintain its cost advantage, which is crucial for its future growth.

We currently have a stock price estimate of $12 for JetBlue, about 5% below its current market price.

See our complete analysis of JetBlue here

New Airbus A321s To Retain Its Cost Advantage

At a recent presentation, JetBlue mentioned that the new Airbus A321s are 10-15% more cost efficient than its existing fleet of Airbus A320s. In addition, the sharklets that the carrier is installing on its existing A320s are to improve the fuel efficiency of those airplanes by 3-4% on long haul transcontinental routes. ^[1] We figure cost savings from these measures will help reduce JetBlue’s fuel costs, which last year constituted nearly 38% of its total operating costs. ^[2]

Effectively, these cost savings will help JetBlue retain its cost advantage and its ability to price fares lower than the network carriers. Higher passenger traffic driven by these lower fares will help JetBlue to continue to grow its market share, revenues and profits.

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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 [↩]