JetBlue 2Q Preview: Strong Unit Revenue Coupled With Fuel Cost Savings To Drive Earnings

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JetBlue Airways

JetBlue Airways Corporation (NASDAQ: JBLU), which did not plummet over rumors of a demand supply mismatch in the domestic market, is scheduled to announce its second quarter operating results on Tuesday, 28th July 2015((JetBlue Announces Second Quarter Results, 14th July 2015, www.jetblue.com)). Based on the airline’s latest traffic numbers, we expect the low-cost carrier to report a significant increase in its passenger traffic driven by its rapid capacity expansions during the June quarter. Given the strong domestic air travel demand, the airline forecasts its passenger unit revenue to improve, unlike its competitors who have witnessed a sharp decline in the key metric. Consequently, we expect JetBlue to deliver a notable increase in its earnings driven by the improvement in its unit revenue coupled with the lower fuel costs. Here’s a quick look at what we expect from the airline’s second quarter results.

2 month price movement

Source: Google Finance

Strong Unit Revenue Will Likely Boost Revenue

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Similar to the last quarter, JetBlue grew its capacity at a high rate to expand its market share. We expect the airline to match the higher end of its capacity guidance of 5.5%-7.5%((JetBlue Announces June Traffic Results, 13th July 2015, www.jetblue.com)) for the June quarter. This is likely to result in a rise of greater than 8.5% in the airline’s passenger revenue. Consequently, JetBlue’s load factor (number of passengers flown per flight) is also expected to increase, unlike its competitors who have experienced a decline in their occupancy rate. Further, with a high exposure to the domestic market, we expect the airline to surpass the foreign currency headwinds, improving its unit revenue by 0.5%-1.5%, in line with the airline’s previous guidance. Keeping all these factors in mind, the market expects the low cost carrier to post quarterly revenue of $1.61 billion, marking an increase of 8% compared to last year’s revenue.

JBLU

Source: Bank of America Merrill Lynch 2015 Transportation Conference

Lower Fuel Costs To Improve Earnings

According to the last investor update, JetBlue had hedged approximately 20% of its second quarter fuel requirements, expecting to realize an average fuel price of $2.11 per gallon((JetBlue’s Investor Update, 28th April 2015, www.jetblue.com)) in this quarter. But, given the slower-than-expected oil price recovery, we expect the airline’s fuel costs to average at an even lower price, translating into higher fuel cost savings. However, these cost savings are likely to be marginally offset by an expected increase of 1%-3% in the airline’s unit costs (excluding fuel and special items) during the quarter. Yet, we estimate the airline to deliver strong growth in its bottom-line driven by the low fuel expenses. The market estimates JetBlue to earn a profit of $0.44 per share for the quarter.

Conclusion

While the rest of the US airlines continue to struggle due to pricing pressures, we expect JetBlue’s domestic presence to augment its unit revenues, resulting in a notable top line growth. Additionally, the lower-than-expected fuel costs will boost the low cost carrier’s earnings for the quarter.

Our price estimate for JetBlue stands at $22 per share, approximately 2% behind its current market price.

See Our Complete Analysis For JetBlue Airways Here

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