VALUATION HIGHLIGHTS

1. JetBlue Passenger Flights constitute 80% of the Trefis price estimate for JetBlue Airways's stock.
2. Ancillary Fee and Cargo constitutes 20% of the Trefis price estimate for JetBlue Airways's stock.

WHAT HAS CHANGED?

JBLU Stock Performance

JBLU stock has suffered a sharp decline of 60% from levels of $15 in early January 2021 to around $6 now (Feb 2, 2024), vs. an increase of about 30% for the S&P 500 over this roughly 3-year period.

Notably, JBLU stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -2% in 2021, -54% in 2022, and -14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that JBLU underperformed the S&P in 2021, 2022 and 2023.

Q4 2023 earnings update

JetBlue's most recent quarter - Q4'23 - financial report was released on January 30, 2024. The company reported revenue of $2.3 billion, down 4% from $2.4 billion in Q4'22, as a 3.3% y-o-y rise in capacity was more than offset by a 7.5% fall in revenue per available seat mile. The company reported a 470 bps contraction in operating margin to -2.9%. Its loss of $0.19 on a per-share and adjusted basis was down from a profit of $0.22 per share in the prior-year quarter.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 $0.163 in 2022 on higher passenger fares driven by fuel price hikes. We expect this to increase to $0.163 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 $0.18 by the end of the Trefis forecast period, then there could be a potential upside of approximately 10% to the Trefis price estimate for JetBlue Airways's stock.

Fuel Costs % Of Passenger Revenues: JetBlue's fuel cost as a percentage of its passenger revenues was 36.2% in 2022.

We expect JetBlue's fuel cost as a percentage of its passenger revenue to decrease in the near term due to stabilizing crude oil prices the world over. We anticipate this percentage to drop moderately in the outer years of the Trefis forecast period to reach 28% 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 32% by the end of the Trefis forecast period, then there could be a potential downside of around 15% to the Trefis price estimate for JetBlue Airways's stock.

BUSINESS SUMMARY

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 the markets it serves with a strong core product and reasonably priced optional upgrades.

SOURCES OF VALUE

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.

KEY TRENDS

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 increases 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 onboard WiFi/food/drinks, etc. Accordingly, airlines are investing in enhancing their product offerings including 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 believe 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 the 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 smaller number of players in the market has made it easier for those remaining airlines to add capacity with restraint. Before 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 believe as long as airlines add capacity with discipline, the industry will remain profitable overall.