JetBlue & Alaska Plan To Aggressively Expand Capacity As Solid Demand Lifts Their Q3 Results

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JetBlue (NASDAQ:JBLU) and Alaska (NYSE:ALK) plan to expand their flying capacity at strong rates in the fourth quarter as solid demand for air travel lifted their third quarter results. While larger U.S. airlines including American, United, Delta and Southwest have grown their flying capacity marginally in 2014, JetBlue and Alaska have expanded quite aggressively. And, these smaller airlines plan to retain their aggressive capacity stance in the fourth quarter, expanding by over 5% on a year-over-year basis.

We figure this aggressive capacity expansion by JetBlue and Alaska is aimed at growing their market shares. Both JetBlue and Alaska leverage their low-cost structure to offer lower fares, eating into domestic market shares of larger network airlines. At the same time, this aggressive capacity expansion from JetBlue and Alaska has been measured, as their occupancy rates (percentage of seats occupied by revenue paying passengers in a flight) have been steady.

A crucial factor that has enabled all major U.S. airlines to expand their flying capacity in 2014 is the steadily growing demand for air travel in both domestic U.S. and many international markets. And airlines are banking on this demand environment to remain solid as they continue to expand their capacities.

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JetBlue’s Capacity Outlook & Q3 Result

JetBlue plans to raise its flying capacity by 5-7% per year in the fourth quarter, focusing on its core markets of New York, Boston and the Caribbean. [1] The airline was able to grow its third quarter profit to $79 million, from $71 million in the year ago period as solid demand for flights lifted its passenger revenue strongly. [2] However, JetBlue faced rising employee salaries, which partially offset gains from higher passenger revenue.

In our opinion, as the demand for flights is likely to remain solid in coming months, JetBlue will likely be able to keep growing its top line through capacity expansion. The carrier’s unit revenue (amount collected from each passenger per seat for a mile of flight) could also rise with expansion of its premium class Mint service. Currently, JetBlue is offering this service on New York-Los Angeles and New York-San Francisco routes. With its higher fares, the Mint service will likely lift JetBlue’s average unit revenue, boosting its revenue growth.

We currently have a stock price estimate of $11.66 for JetBlue, about 4% ahead of its current market price.

See our complete analysis of JetBlue here

Alaska’s Capacity Outlook & Q3 Result

Separately, Alaska plans to expand its flying capacity by about 10% annually in the fourth quarter. [3] This is the highest rate of capacity expansion forecast by any major U.S. airline for the fourth quarter. We figure this aggressive capacity expansion by Alaska is driven not only by a desire to grow market share but also by the need to defend Seattle from Delta. Since the start of 2014, Delta has rapidly expanded its service at Seattle in an attempt to establish the city as its international gateway to Asia. The airline started 2014 with 38 daily departures from Seattle, and currently it has over 95 daily departures from the city. [4] Seattle for many years was dominated by Alaska and this sudden expansion by Delta compelled Alaska to expand its own network out of Seattle so as to prevent frequent fliers from shifting to Delta. Frequent fliers typically prefer to register with an airline that has a larger network out of their base city. This helps frequent fliers earn more miles and rewards.

That said, aggressive capacity expansion by Alaska has come at a cost to the airline. Alaska’s unit revenue has remained under pressure as it has expanded aggressively. In the third quarter, the airline’s unit revenue fell by 1% on a year-over-year basis, meaning it was able to collect less money per mile of flight from each passenger that flew on it. [3] In comparison, unit revenue of all other major U.S. airlines rose in the third quarter, as higher demand for flights enabled airlines to collect more money per mile of flight from each passenger. In Alaska’s case, increased competition from Delta has reduced Alaska’s pricing ability, pressurizing its unit revenue.

However, despite increased competition, Alaska was able to improve its third quarter profit (excluding special items) to $200 million, up 27% from same period last year. [3] The carrier benefited from its cost cutbacks that it implemented over the past few years. (See How Successful Has Alaska Been Is Lowering Its Costs?) Alaska subcontracted many services to third-party vendors to lower its operating costs. The carrier also increased the share of alaskaair.com in total bookings to save on distribution costs, and lowered airplane maintenance costs by replacing older less efficient airplanes in its fleet with new airplanes, which include Boeing 737-900ER. As a result of these measures, Alaska was able to reduce its non-fuel unit costs. Gains from these cost cuts, helped boost Alaska’s third quarter profit.

In all, with demand for flights likely to remain solid, aggressive capacity expansion by JetBlue and Alaska will likely continue to grow their passenger traffic and results in coming months.

We currently have a stock price estimate of $49 for Alaska, about 5% below its current market price.

See our complete analysis of Alaska Air Group here

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Notes:
  1. JetBlue’s investor update, October 23 2014, www.jetblue.com []
  2. JetBlue’s 2014 Q3 earnings form 8-K, October 23 2014, www.jetblue.com []
  3. Alaska’s 2014 Q3 earnings form 8-K, October 23 2014, www.alaskaworld.com [] [] []
  4. Alaska analysts on Delta intrusion, July 21 2014, www.thestreet.com []