JetBlue Airways‘ (NASDAQ:JBLU) latest traffic report shows that the company continues to expand capacity in the face of cutbacks by competing carriers, but seat availability is growing slower than passenger numbers as the airline retains its focus on yields.  As long as traffic persists in outpacing capacity, this judicious strategy should allow JetBlue to gain market share even as the wider industry enters a downturn. With this in mind, we see a potential 85% upside on the stock based on the Trefis price estimate of $7.
Capacity Growth Worthless if Yields Decline
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Having been founded in 1999, JetBlue is a relative newcomer to the US aviation sector. Unlike legacy rivals American Airlines (NYSE:AMR) and US Airways (NYSE:LCC), the carrier has the advantage of a young fleet which offers at least partial protection from rising fuel costs. With operating costs at manageable levels, the airline has succeeded in growing its fleet to 167 aircraft. Orders for a further 121 jets should see it gain additional market share, but this will only be possible if demand supports ongoing growth in capacity. Given the current economic headwinds, the industry-wide trend has conversely been to curtail growth and focus instead on operating fewer flights, but with more filled seats and higher paying passengers.
Tight capacity management has been the mantra of both American Airlines and US Airways, who cut domestic available seat miles by 2.1% and 4.3% respectively last month.   With falling supply, airlines enjoy the dual benefit of higher fares and higher load factors (seat occupancy). This in turn secures high yields, offsetting the heavy fixed costs endemic in aviation.
So Why is JetBlue Raising Capacity Then?
Given the abundance of caution elsewhere in the domestic sector, it seems fair to be wary of JetBlue’s unrelenting bullishness. However, a closer look at its October traffic report shows that, for now at least, the airline is managing capacity as vigilantly as other carriers. While October capacity grew by 6.5% last month, this was comfortably outpaced by traffic growth of 7.6%. Contrast that with rivals American Airlines and US Airways, whose domestic capacity slumps came in step with slower traffic declines of 1.8% and 3.2% respectively. For all three airlines, the priority has been tightening capacity relative to demand. JetBlue is doing the same thing as its older rivals – it just happens to enjoy stronger demand during its growth phase.
This shared strategy is the reason all three carriers have been able to keep load factors high. Total seat occupancy across domestic and international flights is virtually identical between the competitors – 83.2% for American Airlines, 83.5% for JetBlue and 83.7% for US Airways. As long as JetBlue continues defending its load factors and avoids the temptation of laying on excess capacity, its yields should be protected and its growth prospects will remain rosy.
Should macroeconomic events erode passenger demand, JetBlue will of course have to join its rivals in lowering capacity. But for now the airline appears to be growing at a responsible rate, and we believe even with flat load factors the price estimate of $7 is justified. Try moving the trend-line above to see how more or fewer empty seats will impact this valuation.
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