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A Small Airline Can Make Big Waves too

April 02, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

After a solid fiscal 2013, JetBlue Airways Corporation (JBLU) is expected to deliver somewhat weaker results for the first quarter of 2014. The rough winter climate will likely reduce revenue by approximately $45 million and operating income by $30 million for quarter one, with this year’s Easter set in April instead of March, further affecting performance. Also, the snowstorm that hit the U.S. at the beginning of March forced the company to cancel several flights from the Aeropuerto Internacional de Las Américas (AILA) to New York, causing concern among customers.

Nonetheless, despite climatic difficulties, this airline has been performing very well, boosting its Neutral rating to an Outperform rating. So, with investment gurus like Stanley Druckenmiller (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) buying this firm’s shares last quarter, let’s see what the future holds.

A Change of Route Can Go a Long Way

As the fifth largest passenger carrier in the U.S. – and with the youngest and most fuel- efficient fleet – JetBlue operates over 800 daily flights, distributed among 82 destinations in 25 countries across the Caribbean and Latin America. Inland destinations often focus on Boston, Fort Lauderdale, or L.A., but New York’s John F. Kennedy International Airport (and surrounding New York airports) is the company’s most important hub. In fact, by 2015 the firm will be opening its new international arrival facility at JFK Terminal 5, in order to reinforce its competitive advantage over rivals like Spirit Airlines Incorporated (SAVE) and Southwest Airlines Co (LUV). The recently launched daily service between Detroit and Boston will further contribute to management’s goal of fulfilling corporate travel demand and reducing the seasonality of its network. The new daily service will also include a route from Fort Lauderdale to locations in the Caribbean, and the route Port-of-Spain to New York.

On another note, JetBlue’s strong branding and unique flying experience are bound to continue driving profits in the long term future. The cost effective premium service offering, Mint, along with in-flight entertainment services like Wi-Fi access will surely fuel demand for luxury seats, thereby boosting the company’s capacity and generating $190 million in ancillary revenue for 2014. The TrueBlue loyalty program (customer can earn/use points as a group) will add on to profitability by boosting customer loyalty. Furthermore, the carrier’s positions as the only non-unionized airline in the industry allows for far greater flexibility in the cost structure, which should sustain long term growth.

Valuation

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Overall, JetBlue has done a good job in sustaining a solid growth curve throughout 2013, despite terrible weather conditions and an increase in maintenance costs. Nevertheless, total operating revenue grew at a 9.2% rate year-over-year, closing at $5.4 billion for 2013, supported by a 6.8% increase in airline traffic and 6.9% boost in capacity for the same year. Moreover, EBITDA has maintained a healthy 9.10% growth increase, and after a complicated 2012, the company’s free cash flow levels are back up to $121 million from a -$129 million. This upward trend is also notable in the firm’s returns on invested capital, which has grown 3% from 2012’s results to a current 7.9%.

Furthermore, with earnings per share growing at a 20.5% rate, and expected to jump from 2013’s $0.5 to $0.72 for this fiscal year, I believe shareholders will likely benefit from this airline’s long term growth prospects. Also, while the stock is currently trading at a price premium of 35% relative to the industry average of 12.7x, I don’t see this firm as overvalued. In fact, investors should expect JetBlue’s price to continue an upward trend over the next few years, as the company grows stronger.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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