JetBlue stays aloft despite difficult quarter for airlines

The company has a promising expansion strategy with a focus on the Caribbean and Latin American markets.

By Trefis May 1, 2012 5:07PM

Although the first quarter was weak for the airline industry overall, JetBlue (JBLU) surprised the markets last Thursday with a 19% jump in revenues for its first quarter driven by a 1.5 point improvement in load factor, a 6.6% rise in fares and a 12% jump in capacity. The company also managed its costs effectively to achieve operating margin of 7.4%, a 3% rise year-over-year. The stock jumped after the announcement, but has since settled back to close May 1 at $4.72.

 

Sitting on strong top-line growth and improved operational efficiency, the carrier reported a net GAAP income of $30 million. JetBlue outshined several of its peers that include Southwest (LUV) and United Continental (UAL) with robust earnings.

 

Going forward, the company is well equipped to adopt an expansion strategy with focus on the Caribbean and Latin American markets. However, the main concern is its declining cost advantage from a young and fuel-efficient fleet.


JetBlue Stock Break-Up

Capacity expansion to drive international markets


With cash and cash equivalents of $1.2 billion combined with robust demand, JetBlue is well suited for capacity expansion. The carrier plans to initiate a new nonstop service from Boston to Dallas/Fort Worth and expand into Bogota, one of its most profitable markets. Other promising markets are Caribbean and Latin America where the company is planning a 15% capacity expansion this year. All these capacity addition exercises are expected to generate a 4-6% available seat mile (ASM) growth in 2012.


Maintenance costs threatening JetBlue's cost advantage


JetBlue's 15% increase in operating expenses is mainly attributed to the rise in fuel expense and maintenance expense. The carrier has adopted the best possible measures to cover fuel price turbulence through optimum hedging strategies and a fuel efficient fleet. However, its cost benefits through maintenance savings on a relatively young fleet are slowly fading away.


The carrier incurred maintenance expense of $88 million this quarter, a whopping 67.5% increase. This rise in costs is attributed to heavy maintenance checks for A320 aircraft acquired in mid-2000s. The carrier's key maintenance provider, Aveos, liquidated in March and, because of this, the maintenance bill for the rest of the year is expected to inflate as JetBlue seeks alternate repair options. Overall, the maintenance costs for the airline will continue to rise significantly as the fleet grows old.


JetBlue Operating expenses as percent of passenger revenue

The carrier has hedged 26% of the anticipated jet fuel requirements for Q2 and 21% of fuel consumption for second half of 2012. As a result, the estimated fuel price including the impact of hedging is an expected $3.30/gallon. Should the revenues continue to rise at this pace, the operating expenses can be easily offset through strengthening top-line.


We have a Trefis price estimate of $7.84 for JetBlue, well above the market price. We are in the process of revising our price estimate incorporating the Q1 earnings.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
267
267 rated 2
467
467 rated 3
605
605 rated 4
645
645 rated 5
691
691 rated 6
617
617 rated 7
459
459 rated 8
313
313 rated 9
130
130 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.