Leading low-cost airline JetBlue Airways (JBLU) recently posted strong top-line growth for the first quarter despite facing turbulent macroeconomic conditions.

The company has been able to outpace the competition through its low cost structure, young fleet, and efficient scheduling and operation of aircraft.

Operating a fleet of 172 aircraft, the carrier currently holds 4.63% of the U.S. market share and 0.85% of the international market share in terms of available seat miles (ASMs). As the carrier realized stiff competition in the domestic markets, it has been consistently focusing on international markets to sustain top-line growth with a prime focus on Caribbean and Latin American (LATAM) regions. JetBlue competes with major U.S. passenger airlines, including United Continental (UAL), Southwest Airlines (LUV), and US Airways (LCC).

The stock has fallen almost 10% this year, reaching $4.70 which is way below $8.84 Trefis price estimate for JetBlue. Here are some of the key drivers that justify a higher valuation for this stock.

1) Strong capacity growth pipeline

While other leading players in the airline industry are going through capacity caution mode, JetBlue has made a phenomenal growth in ASMs in the recent past.

The carrier plans to increase the ASMs by 6% to 8% this year when the other airlines are planning for zero or even negative ASM growth in the same period. Going forward, it has also booked firm orders for 123 aircraft and has an option for buying additional 56 aircraft by 2021. If JetBlue were to successfully take delivery of all these aircraft, it would almost double the existing fleet. The aircraft order pipeline itself speaks volumes about the growth opportunities that lie ahead for this carrier. As the fleet size increases, the rise in capacity will boost its market share.

2) Shift to high-potential international markets

In order to efficiently deploy capacity additions, JetBlue has been targeting high-potential international markets, primarily Caribbean and Latin America regions including San Juan, Puerto Rico. The carrier plans to initiate nonstop services for existing routes, and also expand into Bogota, one of its most profitable markets. The carrier is prominently entering into code-sharing agreements with other major carriers, Japan Airlines and Emirates being the recent ones. These agreements would further enhance its international service offerings. Also, the recent improvement in demand for airline travel enables promising domestic growth prospects.

3) Low-cost structure

JetBlue has the youngest and most fuel-efficient fleet of any major U.S. airline. Further, JetBlue is able to spread its fixed costs over a greater number of flights and available seat miles by scheduling and operating its aircraft efficiently.

The absence of unions in the work force also helps in maintaining highly productive environment thereby keeping a check on the costs. With an average fleet age of 6.2 years, the carrier has benefited from low maintenance costs for many years. In fact, the company has one of the lowest Cost per Available Seat Mile (CASM) excluding fuel in the industry. Though the maintenance costs are expected to rise with aging fleet, the airline has strategized well to limit diversity in the aircraft which will help it to maintain a relative edge over competing airlines.

While the carrier has managed its internal cost control processes quite well, it is doing a decent job in keeping a check on external cost factors. Fuel expenses, which account for more than one third of the total operating expenses, are extremely volatile due to global economic and geopolitical factors. While the entire airline industry is affected by the fuel price headwind, JetBlue has been hedging a fair amount of fuel requirement (42% in Q1 2012) to cap the rising fuel bill. In order to cover the increased jet fuel expenditure, the airlines have passed the fuel cost to the passengers, a trend which is expected to continue. Going forward, a low cost structure will help keep a check on JetBlue's average fares.

To grow its intangible value, JetBlue has established itself as a leading brand in the low cost airline segment through high quality service and focus on customer delight. It has differentiated itself from the competition by offering facilities such as in-flight entertainment systems, leather seats, extra leg room space, etc., at a discounted price.

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