How Is JetBlue Planning To Improve Its Profitability? – Part 2

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In a previous article, we discussed the revenue-side measures that JetBlue (NASDAQ:JBLU) is taking to improve its profitability. In this article, we explore the cost-side measures that JetBlue is taking to improve its margins and return on invested capital (ROIC). JetBlue is adding more fuel-efficient airplanes to its fleet in an attempt to lower its operating costs. The carrier is also set to cut its non-aircraft capital expenditures in 2015, which will boost its ROIC. In all, through these revenue and cost-side measures, JetBlue is aiming to lift its profit and ROIC in line with those of leading U.S. airlines.

We currently have a price estimate of $13 for JetBlue, around 10% below its current market price. JetBlue’s stock has risen by about 15% over the past month, primarily driven by the sharp decline in global crude oil prices. We currently estimate JetBlue to post earnings of 70 cents per share in 2014, compared with its consensus earnings estimate of 69 cents per share.

See our complete analysis of JetBlue here

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JetBlue’s Fleet Investments Will Reduce Its Operating Costs

JetBlue is adding more Airbus A321s to its fleet. The carrier estimates that this new airplane is 12% more cost efficient than the Airbus A320, which currently constitutes the bulk of its fleet. [1] So, the addition of more A321s will reduce JetBlue’s overall operating cost. In addition, JetBlue is equipping its A320s with sharklets – curved extensions at wingtips – which improve the lift that an airplane generates from surrounding air. The installation of sharklets is expected to improve the cost efficiency of JetBlue’s A320s by 1-3%. Through these measures, JetBlue estimates that growth in its non-fuel unit costs will come down to below 2% per year, from 3.8% per year in 2013. [1] Non-fuel unit cost is a standard metric which measures how well an airline manages the costs that it can control. Fuel costs, being linked to global crude oil prices, are excluded from this metric. If JetBlue is able to limit growth in its non-fuel unit cost to under 2% per year, then its margins should expand as growth in the carrier’s unit revenue is expected to be higher.

Improvement in margins is also essential for JetBlue to retain its historic cost advantage relative to network carriers. Since its inception, JetBlue has relied on a low-cost operating model to offer lower fares relative to network carriers such as American (NASDAQ:AAL), Delta (NYSE:DAL) and United (NYSE:UAL). Lower fares in turn have attracted passenger traffic to JetBlue, growing its market share. But in the past few years, network carriers including American, United and Delta have lowered their operating costs by restructuring under bankruptcy protection. This has reduced JetBlue’s historic cost advantage and its ability to offer lower fares vis-a-vis network carriers. So, these fleet investments that will reduce JetBlue’s operating costs are also important to protect the carrier’s business model.

In 2015, JetBlue’s non-aircraft capital expense will decline to about $150-200 million, from $320 million in 2014. [1] The carrier’s non-aircraft capital expense increased sharply in 2014 as it spent large amounts in acquiring slots (specific take-off and landing timings) at the Washington Reagan National Airport and building the T5i terminal at New York’s JFK Airport. Lower non-aircraft capital expense in 2015 will also help improve JetBlue’s ROIC.

All in all, the revenue and cost-side measures that JetBlue is taking will likely boost its results in the coming quarters.

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Notes:
  1. JetBlue 2014 Analyst Day, November 19 2014, www.jetblue.com [] [] []