JetBlue’s 3Q Profits Soar As Oil Prices Remain Depressed

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JetBlue Airways

JetBlue Airways Corporation (NASDAQ: JBLU), which announced its third quarter operational performance earlier this week [1], posted a significant rise in its earnings driven by the lower fuel costs during the quarter. However, it was the first quarter in this year when the airline faced a slight decline in its unit revenue. Despite this, the airline outperformed the industry’s revenue growth for the September quarter on the back of aggressive capacity expansions and passenger traffic growth. For the next quarter, the New York-based carrier has increased its full year capacity growth plans due to higher utilization of its Mint service and better operational performance. Keeping this in mind, we expect fuel cost savings, coupled with its rapid capacity additions, to drive JetBlue’s earnings even in the next quarter. In this article, we discuss the major trends from the airline’s latest earnings release.

Our price estimate for JetBlue stands at $25, largely in line with its current market price.

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Source: Google Finance

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Capacity Expansions Boost Top Line Growth

Similar to the last quarter, JetBlue continued to grow its capacity at the highest rate in the industry. Despite fears of a surplus of seats in the domestic market, the low cost carrier expanded its third quarter capacity by 10.4%, resulting in a passenger traffic growth of 9.2%. However, this led to a drop of 1% in the airline’s load factor (occupancy rate), which implies that the airline flew more empty seats per plane compared to the same quarter last year. However, the major highlight of the earnings release was the slip in JetBlue’s unit revenue. While the drop in the unit revenue was not significant, it indicated that the airline was not immune to the rising domestic competition and other global trends which have been affecting the larger airlines. Yet, the growth in passenger traffic enabled the airline to register a notable improvement in its revenue for the September quarter. JetBlue recorded third quarter revenue of $1.69 billion, compared to $1.53 billion a year ago.

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Source: JetBlue Form 8-K, 27th October 2015

Fuel Cost Savings Continue To Expand Earnings

Due to the slower-than-expected recovery of oil prices in the last three months due to the fears of a potential economic downturn in China, JetBlue managed to record average fuel price of $1.85 per gallon, lower than the airline’s previous guidance of $1.95 per gallon, despite having fuel hedges for roughly 14% of its consumption. This represents a decline of almost 39% in the fuel prices on a year-on-year basis. However, the impact of fuel cost savings was partially offset by the increase in the low cost carrier’s unit costs (excluding fuel and special items) and labor expenses. Nonetheless, the airline saw a drastic improvement in its operating income and margins. JetBlue’s operating income more than doubled to $351 million, translating into an operating margin of 20.8%, almost 10% higher from last year. As a consequence, the airline’s net income also went up to $198 million from $79 million in the same quarter last year, representing an increase of over 150%.

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Source: JetBlue Form 8-K, 27th October 2015

Outlook For 4Q

JetBlue expects to increase its system capacity between 8.5% and 10.5% in the fourth quarter. In addition, the airline has raised its full year capacity guidance to 8.5%- 9.5%, from the previous guidance of 7%-9% for the full year [2]. This guidance revision is driven by the higher utilization of its Mint fleet, and continued better-than-expected completion factor generated by the carrier in the year so far. Further, the airline has hedged approximately 15% of its fuel consumption for the fourth quarter. Based on the current oil prices, the low cost carrier anticipates its fuel price to average at 1.77 per gallon for the December quarter. However, the airline estimates its unit costs (excluding fuel and special items) to increase by 0-2% in the next quarter and by 0-1% for the full year 2015.

Thus, we figure that JetBlue will continue to enjoy the benefit of the lower fuel prices in the next few quarters and will use the excess cash generated from these savings to expand its operations to gain market share.

See Our Complete Analysis For JetBlue Airways Here

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Notes:
  1. JetBlue Announces 3Q Results, 27th October 2015, www.jetblue.com []
  2. JetBlue Investor Update, 27th October 2015, www.jetblue.com []