Airline stocks have retracted as of late, and the pullback has created a few buying opportunities. Despite the fact that crude oil is still 60% lower than its 2014 highs, airline stocks have retracted due to a weak unit revenue environment.
While unit revenue is an important metric, investors are giving it too much credit. Airline investors have stopped focusing on profits and are instead valuing the stock on the basis of unit revenue. This, however, is not fair because profits at airlines are soaring, and the many carriers have used the money shrewdly to expand their businesses and pay off their debts. One such carrier is JetBlue (JBLU, Financial).
A smart move
JetBlue has a robust presence in New York and Boston, as these are the company’s best two markets. Most of the company’s New York-area flights are grounded at JFK Airport, and it is considerably less prevalent among business tourists.
Consequently, while the company offers equitably frequent flights from Boston to JFK Airport, it is not as appealing to customers as American Airlines (AAL, Financial). It is mandatory for the company to do something about business travelers on this path.
JetBlue did get some good news as recently the FAA decided to lift slot restrictions on Newark Airport. Because of this, the company will be able to add flights there. JetBlue plans to shift six daily flights to Florida from LaGuardia Airport to Newark Airport. Because of this, there will be some free LaGuardia slots to run six daily round trips to Boston.
Returning cash reliably
Delta Air Lines (DAL, Financial) was one of the first airlines to re-establish a dividend and share buyback program three years before. At that time also, Delta was producing robust free cash flow and had made considerable improvement in decreasing its debt load.
Delta has endured to decrease its debt even as it has escalated its dividends and buybacks since 2013. This step allowed Delta to achieve an investment-grade credit rating three months earlier.
The company has decided to follow the same approach. In the last few years, JetBlue has been belligerently focused on paying down debt, and the company has only repurchased plenty of stock to balance the shares dispensed as part of its stock compensation program. However, it is unlikely that JetBlue will offer dividends any time soon, but investors can be satisfied knowing that the carrier’s management believes in the stock’s undervaluation.
Conclusion
JetBlue was one of the best performing airline stocks in 2015, but 2016 has been a terrible year for the carrier. JetBlue’s selloff is overdone, and the stock is a screaming buy on the pullback.
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