JetBlue Airways Corp. (JBLU, Financial) was almost flat in 2016 mainly due to a strong recovery in oil prices. The stock was off to a gloomy start heading into 2017, but it has regained its lost momentum and is down just 2% year to date.
As a matter of fact, oil prices play a significant role as they are directly proportional to the operating costs of airlines. Since the beginning of 2017, oil prices have been moving downward mainly due to a persistent oil supply surplus, and prices are expected to hover around $53 per barrel for the second half of this year.
JetBlue reported mixed first-quarter results in April. For the first quarter, the company reported earnings per share of 25 cents, exceeding the analysts’ estimate by 2 cents. Despite beating the analysts’ estimate, that figure represents a sharp drop compared to the same quarter of fiscal 2016. The company’s profit margin plunged considerably.
The primary reasons behind the margin fall were higher fuel prices, the Easter calendar shift and recent wage surges as well as rising maintenance costs for the airlines’ old fleet.
On the other hand, its revenue came in at $1.60 billion, missing the consensus by $30 million. That figure represents a drop of 1.2% year over year. The most important thing to notice is that JetBlue managed to report positive revenue growth over the past 12 quarters. Unfortunately, the airline’s impressive streak of positive revenue growth got disrupted in the first quarter of fiscal 2017.
That does not mean growth is over for the airline as it has made several tactical adjustments, and the airline’s profitability may stabilize as a result.
Through the past five years, almost 97% of the company’s growth has been in its six focus cities – Boston; Fort Lauderdale, Florida; Los Angeles/Long Beach; New York; Orlando, Florida; and San Juan, Puerto Rico. To strengthen its presence in these lucrative markets, the airline has planned to raise its capacity in the range of 4% to 6% in the coming quarter.
JetBlue, though, is facing demand weakness in unique markets such as Cuba and San Juan. Regarding Cuba, the company has revamped its revenue strategy and plans to reduce its capacity significantly by switching all of its flights from the 200-seat A321 to the 150-seat A320.
Apart from this, the company also plans to start new flights from Fort Lauderdale to Havana and Boston to Havana. Its growing presence in Cuba should help it in meeting future demand growth and countering its rivals by adding new service.
Conclusion
Although JetBlue disappointed investors in 2016, the stock has shown strong signs of upward momentum this year. The company is making several technological and efficiency enhancements that will certainly help it counter future fuel spikes. Keeping in mind the weakness demand in Cuba, the company has made a smart move by reducing capacity for all of its flights.
On the other hand, the company's focus on expanding its services to Havana could unlock new growth opportunities in the long run. As an outcome, investors should continue holding the stock for future gains as it has massive growth potential.
Disclosure: I do not hold a position in the stock mentioned in this article.
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