A Closer Look At JetBlue’s Strategy

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JetBlue Airways

Since its inception about one and a half decades ago, JetBlue Airways (NASDAQ:JBLU) has grown by leaps and bounds. Within a short span of time, New York’s hometown airline has become the fifth largest passenger carrier in the US based on available seat miles (ASMs). Just like the other airlines, JetBlue, too, had to face a tough time during the economic slowdown in 2009-2010, even though it has revived tremendously ever since. Furthermore, the recent oil price slump has enabled the domestic carrier to explore new markets and reach new heights over the last one year. JetBlue stock has more than doubled, as opposed to only a 25% jump in the Dow Jones Airlines Index, since July of 2014. In this article, we take a closer look at the factors that are responsible for JetBlue’s success so far, and its strategy going forward.

Our price estimate for JetBlue stands at $25 per share, 2% higher than its current market price.

JBLU-DJ

Source: Google Finance

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Rising PRASM Due To Domestic Operations

Passenger revenue per available seat mile, more popularly known as PRASM or unit revenue, is one of most watched metrics in the industry as it is directly linked to an airline’s top line. Over the last six months, the large network carriers, such as American, United, and Delta, have experienced a sharp decline in their unit revenue due to the strengthening of the dollar against other currencies. While this has made air travel cheaper for the US passengers traveling to other countries, it has become expensive for international passengers to fly to the US. This has severely hit the revenues of the legacy carriers who have a significant presence in the international markets. To put things into perspective, Delta expects its unit revenue to be down by 4.5%-5.5% during the third quarter, while American Airlines forecasts its PRASM to drop by 6%-8% during the same period. Since the investors closely track the unit revenue guidance of the airlines, the stocks of these airlines have been unable to reach record highs despite the drastic fall in oil prices.

JBLU-PRASM

Source: Bank of America Merrill Lynch 2015 Transportation Conference, May 2015

On the contrary, JetBlue’s domestic presence has allowed the airline to remain immune to the foreign currency fluctuations and lower surcharges from the international markets. This has enabled the airline to deliver a constant rise in its unit revenue in the first half of the year, despite the aggressive capacity expansion undertaken by the airline. As a result, JetBlue’s stock has gone up by over 56% since the beginning of the year and reached a new 52-week high of $27.36 per share last month, while the stocks of the larger network carriers have declined by more than 10% on an average year-to-date, despite the boost from declining oil prices. Thus, we figure that JetBlue’s domestic presence is one of the key factors that have allowed it to outperform its larger competitors.

JBLU-Change

Source: Google Finance

Low Cost Advantage

Being a domestically based low cost carrier, JetBlue clearly has cost advantage over its peers. The low cost structure has enabled the airline to enter the territory of the larger airlines and generate industry leading margins. In fact, the airline managed to expand its margins by approximately 14% in the first quarter as opposed to the 7% margin expansion experienced by the industry.

JBLU-Margins

Source: Bank of America Merrill Lynch 2015 Transportation Conference, May 2015

Apart from the low cost structure, the recent plunge in crude oil prices has resulted in huge fuel cost savings for the low cost carrier. While the plummeting oil prices have been boosting the profits of all the airlines, the New York based JetBlue recognizes the fact that the decline in fuel costs may not sustainable in the long term and are likely to shoot up as soon as the commodity market recovers. Consequently, the airline has been undertaking a number of initiatives to control its operating costs (excluding fuel costs). Additionally, the airline is investing heavily on aircraft that are much more fuel-efficient and will improve the airline’s overall operational performance. As a result of these cost control measures, the airline expects to restrict its unit cost (excluding fuel costs) from growing at more than 2% annually over the next couple of years. With its low cost advantage, coupled with lower unit costs, we expect JetBlue to deliver industry leading margins even in the future.

Focus On High Value Markets

JetBlue had launched its premium services called the “Mint” in June last year to tap the business travelers flying on transcontinental routes in the US. This was a smart move since the new service allowed the airline to enter the high value geographies such as Los Angeles and San Francisco, and cater to the elite and corporate passengers and improve its passenger traffic. JetBlue’s Mint service has become very popular over the last 15 months because of its affordability and higher quality of services compared to the expensive and poor services offered by other airlines. Thus, by offering premium services on these routes, the airline managed to earn higher margins and improve its overall performance over the last year. Given the success of this premium service, the airline has announced its plans to offer this service on the Boston-San Francisco and Boston-Los Angeles routes starting next year. We expect the company to add this premium service on other routes in the near future and capitalize on these higher margins.

JBLU-Mint

Source: Bank of America Merrill Lynch 2015 Transportation Conference, May 2015

Further, JetBlue continues to grow its footprint in Latin America and the Caribbean, as these are seen as the most lucrative and high value markets for airlines after Asia. The airline currently offers around 142 daily flights from the US to Latin America and the Caribbean, of which roughly 49 daily flights are nonstop from Fort Lauderdale-Hollywood International Airport and Orlando International Airport. The airline will further launch flights to Mexico City (October 2015), and Quito (February 2016) from these airports. In addition, the New York-based airline is also expected to launch three weekly flights to Antigua from its home base in November this year, subject to government approvals.

Due to the easing of travel restrictions between the US and Cuba this year, JetBlue launched its first weekly flight between New York and Havana. With the success of this flight, the airline has announced a second weekly nonstop charter flight on the route to facilitate passengers to travel to and from the restricted destination. The airline will operate 150-seat Airbus A320 aircraft on this route and provide quality facilities and services such as free Wi-Fi, in-flight entertainment, and free refreshments to the customers. This will further strengthen the low cost carrier’s leading position in the Latin American market. Since JetBlue offers charter flights at competitive fares and with high quality services, we expect the airline to attract higher traffic in the future, which will contribute to its revenue growth in the long term.

JBLU-Markets

Source: Bank of America Merrill Lynch 2015 Transportation Conference, May 2015

Apart from focusing on the Latin American and the Caribbean markets, JetBlue is also expanding its operations domestically. The airline has announced flights to Nashville from Boston and Fort Lauderdale-Hollywood International Airport, beginning in May 2016. This will allow the airline to increase its exposure in Nashville, a fast growing tourist destination, while providing its passengers access to destinations across the US, the Caribbean, and Latin America. These flights will enhance the low cost carrier’s market share, and, in turn, augment its future revenues.

To sum up, we believe that JetBlue’s low cost structure and domestic presence has enabled it to outperform its larger competitors over the last year. Going forward, we expect the airline’s premium Mint service, and entry into new and high value markets, to drive its growth in the long term.

See Our Complete Analysis For JetBlue here

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