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Two Undervalued Airline Stocks That You Should Buy

April 30, 2014 | About:



After decades of losses, the airline sector is finally starting to perform nicely for investors. In an article last month, I penned down my bullish case on Delta and Southwest. However, I think there are two more airline stocks that investors should consider buying for the long-term. These stocks are JetBlue (NASDAQ:JBLU) and Hawaiian Holdings (NASDAQ:HA). Let’s take a look at the reasons why I’m bullish on these stocks.


Following an earnings miss last Thursday, shares of JetBlue dipped below the $8 line for the first time in almost six months. The stock was also hit by a couple of downgrades by Citigroup (NYSE:C) and Bank of America (NYSE:BAC) in the last few weeks. This has created a great buying opportunity for long-term investors. While JetBlue's earnings declined last quarter, this was caused by two unusual factors. First, JetBlue canceled more than 4,000 flights due to a series of snowstorms that hit JetBlue's top two markets: New York and Boston. JetBlue estimated that these cancellations reduced operating income by $35 million.

Second, JetBlue posted a big unit revenue decline last month due to the shift of Easter and Passover from March to April. It will see a corresponding benefit in Q2, as April unit revenue is on pace to rise by 9.5%-10.5%. Thus, the Q1 earnings decline is not really a sign of weak performance.

Looking ahead, JetBlue has multiple important catalysts for margin growth and earnings growth. The most important is the introduction of JetBlue's new Mint premium service on long-haul routes from JFK Airport in New York to Los Angeles and San Francisco.

American Airlines, United Continental, and Delta Air Lines get very high average fares on these routes due to the heavy demand for premium seating, particularly among business travelers. All three legacy carriers either have or will soon have flatbed seats available on all flights for these two routes. By contrast, JetBlue's average fares have been much lower due to the absence of premium seating.

JetBlue is also turning to new technology to reduce fuel consumption. All of its new Airbus aircraft will come with winglet devices called Sharklets that reduce fuel consumption by 3% or so. JetBlue is also retrofitting over 100 aircraft in its fleet with Sharklets. Lastly, JetBlue has placed orders for 60 A320neo/A321neo aircraft, which will offer a double-digit reduction in fuel burn, primarily through more efficient engines. All in all, given the positives, I think investors should definitely consider buying JetBlue after the dip.

Hawaiian Holdings

Unlike JetBlue, Hawaiian Airlines has performed terrifically in the recent past. Share of the airline more than doubled in 2013, however the stock still looks cheap and is poised to move higher in the near future. Hawaiian Airlines has suffered due to the increasing strength of the US dollar, however the company has strengthened its business in the U.S. and this will help it offset the losses incurred internationally. The company is projecting a 4%-7% PRASM increase for Q1, which indicates that currency headwinds are dying down.

Assuming that the yen and Australian dollar exchange rates remain near recent levels, Hawaiian should be able to regain some of the revenue it lost in 2013 by increasing local currency prices in Japan and Australia. More generally, most of Hawaiian Airlines' international markets are still maturing. As brand recognition improves and Hawaiian Airlines learns more of the nuances to competing in each market, unit revenue gains should follow.

In addition, Hawaiian Airlines' new non-ticket revenue initiatives will start to bear fruit in 2014. The company's new branded credit card agreement went into effect last month, providing much better mileage sale terms for Hawaiian. Most importantly, Hawaiian's new premium economy seating (dubbed "Extra Comfort") just went on sale for flights beginning in August. This should become a valuable source of incremental revenue.

Hawaiian Holdings reported an adjusted loss of $0.02 per share, which was a major improvement on the $0.29 a share loss it posted in Q1 2013. This reflects an approximately four-and-a-half percentage point margin improvement for the quarter. Hawaiian's Q2 forecast implies another margin gain next quarter -- albeit more modest -- assuming fuel prices remain near today's levels. While most other airlines will be able to report profits for Q1, it's the weakest quarter of the year -- especially for Hawaiian Airlines, which depends heavily on tourist traffic. Hawaiian's small loss is better than what many analysts feared, as unit revenue came in at the top of the company's most recent guidance and unit costs were slightly lower than expected. This indicates that the airline should perform better going forward.


Given the initiatives of both the carriers, I think investors should consider starting a position in these companies. Both JetBlue and Hawaiian are currently underpriced and have a lot of room to grow in the long-run. Both the stocks have a good risk/reward ratio, which is why I think investors should buy them at current prices.

Rating: 3.0/5 (1 vote)



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