JetBlue Can Fly To $8.90 With Solid Earnings And Outlook

JetBlue Airways (NYSE:JBLU) is scheduled to announce its second quarter earnings Wednesday, July 25. The company reported a good previous quarter with impressive growth in operating income. We anticipate the airline to post strong numbers in its second quarter earnings as well, mainly on capacity expansion, higher passenger traffic and load factor, all of which combine to drive top-line growth. However, we also anticipate the growth to be partially offset by rising aircraft maintenance costs for the airline and higher jet fuel prices.

We currently have a Trefis price estimate of $8.84 for the airline, significantly above its current market price.

See our complete analysis of the airline here

Higher passenger traffic and good operational management to drive growth

As evident from the monthly traffic reports released by JetBlue during the second quarter, there has been significant additions to its capacity. ^{[1] [2] [3]}

Available Seat Miles (ASM), an indicator of capacity, increased by approximately 7% in April and 5% in May and June on a year-over-year basis. A large portion of this capacity expansion occurred on Latin American and Caribbean international routes to cater to increasing demand for flights on these routes. Revenue Passenger Miles (RPM), an indicator of passenger traffic, increased by approximately 15%, 7% and 10% in April, May and June, respectively, from the year-ago period. Load factor too increased by 5.5, 2.2 and 3.8 points for these three months on a year-over-year basis. A combination of these significant increases in capacity, passenger traffic and load factor makes the case for impressive top-line growth for the airline in the second quarter.

However, we also anticipate JetBlue’s bottom-line in the second quarter to be impacted by rising aircraft maintenance costs and higher jet fuel prices.

Rising aircraft maintenance costs to impact bottom-line

JetBlue operates a relatively younger fleet of aircraft comprising 115 Airbus A320 and 45 Embraer 190. This has ensured low maintenance costs for the airline. However, with the increasing age of aircraft, we anticipate these maintenance costs to rise significantly in 2012 compared to previous years. The airline too anticipates its Cost per Available Set Mile (CASM) to rise between 4% and 6% in the second quarter from the year-ago period. ^[4] Excluding fuel, CASM is anticipated to rise between 6.5% and 8.5% in the second quarter on a year-over-year basis. And, nearly two-thirds of this increase comes from higher maintenance costs.

Higher jet fuel prices to impact margins

Also, the airline hedged approximately 26% of its fuel requirements in the second quarter to manage price volatility. It anticipates to incur an average fuel cost of $3.33 per gallon in the second quarter, compared to $3.31 per gallon incurred for the year-ago period. ^[5] This marginal rise in average fuel prices coupled with increases in ASM shall increase the fuel bill for the airline, impacting its margins.

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1. JetBlue Airways Reports April Traffic, May 10 2012, investor.jetblue.com [↩]
2. JetBlue Airways Reports May Traffic, June 12 2012, investor.jetblue.com [↩]
3. JetBlue Airways Reports June Traffic, July 12 2012, investor.jetblue.com [↩]
4. JetBlue Announces First Quarter Results, April 26 2012, investor.jetblue.com [↩]
5. Q2 2011 10-Q, August 3 2011, investor.jetblue.com [↩]