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Investment Overview for JetBlue Airways (NASDAQ:JBLU)

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Impact Of Coronavirus Pandemic

• JetBlue Airways’ stock has declined by more than 65% due to a sharp drop in air travel demand.

• The company operates at a thin operating margin of 5-10% and likely to incur significant losses from temporary suspension of various routes and declining travel demand.

• Per recent filings, the company has raised $1 billion in debt and has been allocated $936 million in government grants to tackle the crisis.

• Considering a 30% decline in capacity, suspension of share repurchases and dividends, and withdrawal of 2020 guidance, we have revised our price estimate for JetBlue downwards by 45%.

• With the current downturn, the FCF for 2020 is likely to be negative around $500 million - $1 billion, which is being met with additional debt on the balance sheet.

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Below are key drivers of JetBlue Airways that present opportunities for upside or downside to the current Trefis price estimate.

JetBlue Passenger Flights

JetBlue's Passenger Yield: JetBlue's Passenger Yield increased from $0.113 in 2009 to $0.133 in 2017 on higher passenger fares driven by fuel price hikes. We expect this to increase to $0.148 by the end of the Trefis forecast period on fare hikes supported by stable demand for air travel.

If however, passenger fares rise more than anticipated either due to a sharp rise in crude prices or due to strong growth in demand for flights and take the yield to $0.162 by the end of the Trefis forecast period, then there could be a potential upside of approximately 10% to the ${trefisprice}.

Fuel Costs % Of Passenger Revenues: JetBlue's fuel cost as percentage of its passenger revenues was 17.9% in 2016.

We expect JetBlue's fuel cost as a percentage of its passenger revenue to increase in the near term due to rising crude oil prices the world over. We anticipate this percentage to rise moderately in the outer years of the Trefis forecast period to reach 33.7% by the end of the forecast period. If, however fuel prices rise more than anticipated, such that JetBlue's fuel costs as a percentage of its passenger revenues reaches 38% by the end of the Trefis forecast period, then there could be a potential downside of around 25% to the ${trefisprice}.

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JetBlue Airways is the fifth-largest passenger carrier in the United States based on passenger traffic (revenue passenger miles), as reported by airlines. JetBlue operates a point-to-point service model with its fleet of Airbus A321s, Airbus A320s, and EMBRAER 190 aircraft. JetBlue's fleet is one of the youngest and the most fuel-efficient fleet of any major U.S. airline. JetBlue serves destinations in the United States, the Caribbean, and Latin America.

JetBlue has significant operations at the Newark International Airport and at New York's John F. Kennedy International Airport, both of which are some of the busiest domestic airports in the U.S.

JetBlue Airways has been recognized as a "value airline" based on its service, style, and cost structure. Known for its award-winning customer service as much as for its competitive fares, JetBlue believes it offers its customers the best coach products in markets it serves with a strong core product and reasonably priced optional upgrades.

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Significant presence in high value geographies

JetBlue, in recent years, has built a strong presence in high-value geographies, which include New York, Boston, and Los Angeles. As a result, the carrier is well-positioned to serve high paying corporate customers that will support growth in its passenger yield and profit.

At the same time, San Juan in the Caribbean is another market that JetBlue has focused on over the last few years. This market has allowed JetBlue to expand its operations to fast-growing destinations in Latin America. However, the hurricanes may slow down the growth capabilities here in the near future.

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Oil prices significantly impact bottom line

Fuel expenses constitute the single largest cost head for airlines, making them vulnerable to hikes in crude oil prices. For JetBlue, fuel costs constitute around a third of its total operating expense. To reduce vulnerability to fuel price volatility, JetBlue engages in fuel price hedging.

Demand for flights is related to global economic growth

Demand for flights is highly correlated to global economic growth. Thus, a decline in economic growth or recession reduces demand for flights, impacting passenger traffic for airlines. On the contrary, steady growth in the global or U.S. economy grows demand for air travel, allowing airlines to raise their airfares, occupancy rates, and profits.

Focus on ancillary revenue

Many airlines, including JetBlue, are figuring out ways to grow their top lines through ancillary means such as baggage fees, access to on-board WiFi/food/drinks, etc. Accordingly, airlines are investing in enhancing their product offerings that include in-flight WiFi and other entertainment options, improved lounge facilities, and extra-legroom seats.

According to an Amadeus/IdeaWorks study, North American airlines collectively produce one of the largest streams of ancillary revenues compared to other regions. A majority of the increase is attributable to stronger merchandising efforts by the carriers as well as the addition of more à la carte services for sale.

Growing preference for low-cost carrier model

During the past decade, low-cost carriers such as Southwest and JetBlue have gained significant market share in the U.S. Looking ahead, we figure these low-cost carriers to continue to grow their market share, as their lower fares attract passenger traffic.

Consolidation in the industry has helped raise profits of all airlines

The U.S. airline industry has seen many mergers and acquisitions in the last decade, including the five big combinations of US Airways and America West, Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.

A more consolidated industry has worked to improve the profits of all airlines. A fewer number of players in the market has made it easier for those remaining airlines to add capacity with restraint. Prior to this consolidation in the airline industry, individual airlines were adding capacity at higher rates in an attempt to grow their market shares. This rapid capacity addition resulted in an oversupply of seats, reducing the margin and profits of all carriers.

Going forward, we figure as long as airlines add capacity with discipline, the industry will remain profitable overall.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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