Why Smart Money Would Pick Southwest Over JetBlue

by Trefis Team
JetBlue Airways
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JetBlue Airways (NASDAQ: JBLU) stock has declined by 55% since early February after the WHO declared the Coronavirus a global health emergency, while Southwest Airlines’ (NYSE: LUV) stock has fared slightly better and lost 44% of its value. The airline industry has been worst affected by the ongoing coronavirus pandemic as travel restrictions have led to a slump in air travel demand. JetBlue Airways and other carriers have reduced seating capacity by more than 50% with further cuts expected in the near term. Passenger air tickets are the largest contributor to JetBlue and Southwest’s top line, and we believe that Southwest is likely to fare better through the crisis supported by its larger fleet, higher margin, and lower debt-to-equity ratio.

Our conclusion is based on our detailed dashboard analysis, Is JetBlue Airways Expensive Or Cheap After A -55.3% Move vs. Southwest Airlines? wherein we compare trends in key metrics for the two airline companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.


Why Has Southwest Outperformed JetBlue Over Recent Weeks?

JetBlue’s P/E based on 2019 earnings has declined from over 10x in 2019 to 5x currently, while Southwest’s multiple has declined from 13x to about 7x. The steeper decline in JetBlue’s multiple can be attributed to its larger fleet and higher debt-to-equity ratio. Moreover, we believe that Southwest would continue to outperform JetBlue due to its higher net margin, stronger cash position, and better solvency ratio. In 2019, JetBlue and Southwest’s debt-to-equity ratio stood at 0.5 and 0.3, respectively.

Recently, the U.S. treasury allotted aid to all airline carriers, with JetBlue and Southwest receiving $936 million and $3.2 billion, respectively, to cover employee costs. However, with the coronavirus pandemic likely affect travel demand for the full year, the first-quarter results (for the period ending March) later this month would confirm both companies’ operational and capital allocation strategy to tackle further deterioration in demand.


But How Long Will Airlines’ Stock Remain Under Pressure?

  • The expected timeline for recovery in global economic conditions, and in Airlines stocks, hinge on the broader containment of the coronavirus spread and the availability of a vaccine. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
  • We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times
  • Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of JetBlue’s multinational peers, including American Airlines and Delta Airlines. The complete set of coronavirus impact and timing analyses is available here.
  • With the government aid likely to cover three months of employee expenditure for JetBlue and Southwest, we believe that JetBlue and Southwest stock at current levels provides a buying opportunity for investors willing to be patient.


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