A focus on network reallocation could improve JetBlue Airways Corp.'s (JBLU, Financial) financial performance.
The company is seeking to reduce exposure to less profitable routes in order to create expansion opportunities for routes experiencing greater demand. It is also looking to diversify its customer base and improve its competitive advantage by offering lower-priced fares. There is scope for ancillary income from increasing charges for additional services.
Although cost increases could hold back its profitability, the company is on track to deliver its efficiency program. A fleet of more efficient aircraft may also reduce costs. Having fallen 20% in the last year versus a decline of 1% for the S&P 500, the stock could have turnaround potential.
Route changes
Network reallocation could boost JetBlue’s performance. The company is reducing its footprint at Long Beach, while closing stations at Daytona Beach, Florida, Saint Croix and Washington D.C.’s Dulles Airport. It is also converting Portland, Oregon to a seasonal service as well as reducing frequencies to Mexico City from Orlando and Fort Lauderdale, Florida. The changes are expected to increase revenue by up to $120 million per annum by 2020.
Reduced services in short-haul flying are set to be offset by increased transcontinental services, which connect New York and Boston to Southern California. These additions form part of a wider reallocation from less profitable services to routes which are among its most popular. Ending flights from specific airports will also reduce fixed costs and allow it fund new routes.
Strategy
The introduction of a basic economy ticket class, which offers a no-frills service that is aimed at price-sensitive consumers, could improve the company’s competitive advantage. It may allow it to compete more effectively on leisure routes, while increase ancillary revenue through additional services charges. For instance, in recent weeks, bag fees, change fees and pet fees have been implemented.
Additional fees are likely to be introduced since the company currently does not charge customers for high-speed WiFi, while many of its rivals have tiered pricing options for broadband usage. Legroom on JetBlue’s aircraft is also greater than for some sector peers, which could offer the potential for higher pricing or more efficient onboard seating plans. In the last couple of months, changes in this area have started to take place. It has added seats to each of its 130 Airbus A320s. It has also upgraded its airport kiosks. This has led to reduced staffing costs since customers now require less assistance than under the previous system.
Uncertainty
Although the price of oil has fallen since early October, its medium-term outlook may cause costs across the airline industry to increase. The sanctions waivers for eight countries to import oil from Iran are due to last for six months. Following that period, there are no guarantees they will be renewed. In such a scenario, supply growth could return to the increasingly limited level, which investors priced in during oil’s pre-October price rise. Alongside potentially higher fuel costs, JetBlue has faced margin erosion in recent months. Rising labor costs following a new pilot contract have offset its cost-saving initiatives.
The company is making progress in an efficiency program, which is set to deliver cost reductions of over $300 million per annum by 2020. A number of changes are being made to airport staffing and crew rotas, maintenance as well as new software tools, which improve the management of spare part inventory and optimize labor hours. So far, the company has delivered over $173 million of its planned cost savings. It will replace its E190 fleet with 60 Airbus A220s between 2020 and 2025. They are set to be 29% cheaper to operate than its E190 fleet on a per-seat basis.
Outlook
A network reallocation could catalyze the financial performance of JetBlue. Reduced exposure to less profitable routes in favor of increasing capacity on highly profitable routes could stimulate sales growth. Ancillary income growth alongside a no-frills basic ticket option may improve its competitive advantage versus industry peers.
While the oil price could recover after its recent fall, progress is being made on the company’s efficiency program. A switch to lower-cost aircraft is planned between 2020 and 2025, while a number of changes are expected to contribute to a $300 million reduction in annual costs by 2020. After underperforming the S&P 500 in the last year, JetBlue may offer turnaround potential.
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