Capacity Additions Along With Low Fuel Prices Will Drive JetBlue’s 1Q Profits

After witnessing remarkable first quarter results by major US airlines, JetBlue Airways Corporation (NASDAQ: JBLU) is now set to announce its operating results for the quarter before the market opens on Tuesday, 28th April 2015.  Earlier this month, the low-cost carrier released impressive traffic results for the March quarter, which are expected to drive the airline’s top-line growth. Additionally, JetBlue’s high exposure to the domestic market, coupled with roll-out of its high-margin Mint premium service on transcontinental routes, will result in a considerable improvement in the airline’s bottom-line. Hence, the market expects the airline to earn a profit of 40 cents versus 26 cents earned in the last quarter.

Our price estimate for JetBlue stands at $18, approximately 9% behind its current market price.

See our complete analysis for JetBlue Airways here

Rapid Capacity Expansion Will Drive Top Line Growth

Following the footsteps of its low-cost competitor Southwest, JetBlue is also adding capacity at a high rate to expand its market share. During the March quarter, the airline’s capacity is expected to rise by 9.6% on a year-on-year basis, resulting in an increase of 11.1% in its passenger traffic ^[1]. This will be the second largest capacity addition in the industry, after Alaska Air which posted a capacity increase of close to 11% during the quarter. In addition, JetBlue’s excessive exposure to the domestic markets will help the airline to bypass the negative effect of currency fluctuations being experienced by legacy carriers. The New York-based airline’s unit revenue is expected to grow by 4.5% during the quarter ^[1], higher than its previous guidance of 3-4% growth. This will be by far the best unit revenue growth recorded by any US airline in this quarter. As a result, we estimate JetBlue to post a record growth in its revenue during the first quarter.

Lower Oil Prices And Non-Fuel Cost Measures Should Boost Earnings

Given the weakness in crude oil prices, the low-cost carrier forecasts its average fuel prices for the quarter to be around $1.97 per gallon ^[2]. Further, JetBlue has added more Airbus A321s to its fleet, which are estimated to be 12% more cost efficient than the currently used Airbus A320. In addition, JetBlue has equipped a number of its A320s with sharklets – curved extensions at wingtips – which improve the lift that an airplane generates from surrounding air. The installation of these sharklets is estimated to improve the cost efficiency of A320s by 1-3% ^[3]. Thus, the airline expects its unit costs (excluding fuel expense and profit sharing) to fall by 1.5-3.5% during the quarter ^[2]. Consequently, we anticipate the airline to deliver a strong growth in its bottom line, driven by rapid capacity expansions and low fuel expenses.

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1. JetBlue’s Traffic Results for March, 10th April 2015, www.jetblue.com [↩] [↩]
2. JetBlue’s Investor Update, 29th January 2015, www.jetblue.com [↩] [↩]
3. JetBlue 2014 Analyst Day, November 19 2014, www.jetblue.com [↩]