Investors like Warren Buffett (Trades, Portfolio) have always been cautious about investing in the aviation industry due to razor-thin margins. His philosophy has proven to be correct as increasing competition has driven many airlines to bankruptcy over the years. With the massive plunge in crude oil prices over the last 15 months, it became impossible for investors to ignore the potential of airline stocks.
An airline usually spends about 33% to 40% of its revenue on jet fuel; with crude oil prices falling over 60% in the last four quarters, it’s not surprising that airlines have been recording record profits.
Investing in the aviation industry just because of cheaper oil can be a risky bet. Oil prices are unpredictable and volatile. Investors should cautiously choose a carrier with the best business model, and a company that fits the bill perfectly is JetBlue (JBLU, Financial).
While many airlines stocks are in the red in 2015, JetBlue has managed to beat that trend and is up close to 60% in 2015. The carrier has been performing very nicely and has been consistent throughout the year, posting record earnings.
Performing better than peers
JetBlue was not able to keep up with the industry in terms of profitability in 2013 and 2014, but the company has staged an impressive comeback over the previous 15 months, as its cash flow and profitability are rising consistently.
Due to increasing capacity, every airline in the U.S. is faced with falling PRASM. JetBlue, due to its unique service and smart revenue-enhancing programs, has managed to dodge this trend as passenger unit revenue increased 2.9% in the first six months.
The carrier is making the most of cheaper oil as it is reducing debt consistently. JetBlue paid off around $200 million of debt in the first six months of 2015.
JetBlue has an advantage, as United Continental is walking out of one of its key markets in late October. With the exit of United Continental, competition will drop on the key routes from JFK Airport to San Francisco and Los Angeles, permitting the company to add flights. The company’s Mint and Even More program have been well-received in these markets, and the exit of United Continental will boost the company’s revenue.
The company also plans to purchase nine new airplanes per year for the upcoming three years to expand capacity. This clearly signifies that JetBlue will continue its expansion; considering that the company has been smart about its past ventures, the plans should be successful.
Final words
While all other airlines are recording declining PRASM, JetBlue has managed to boost revenue thanks to its smart initiatives like Mint and Even More. The company has also started charging baggage fees, which should act as another revenue booster for the coming quarters. All things considered, JetBlue has more upside potential. Expect the share price to cross the $30 mark soon.
