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Published: January 25, 2010
It’s been more than a decade since
JetBlue’s (Nasdaq: JBLU) planes first took to the skies. As
the company’s business model gained altitude, consumers have
continually voted for JetBlue as their favorite carrier. Yet
even with its legions of fans on Main Street, supporters on Wall
Street are harder to find: shares have steadily fallen, from $30
in 2003 to the mid single digits these days. A massive oil
spike, followed by an unprecedented economic downturn, has put
the whammy on profits. But those clouds are parting, and the
low-cost carrier looks ready to climb back to cruising altitude.
To be sure, airline stocks have already recovered off of their
2009 lows, especially carriers most at risk of bankruptcy, such
as UAL (Nasdaq: UAUA), parent of United Airlines, and
AMR (NYSE: AMR), parent of American Airlines. But if history
is any guide, airline share prices should keep rising as
investors see profit margins steadily rebound from a combination
of sharp cost cuts and rising traffic. Right now, profit reports
highlight the heady cost cuts. In the next several years, rising
revenues should expand bottom lines.
Of course, investors remain wary that the economy will truly
emerge in fighting shape, which could bring new troubles for the
legacy carriers with high debt levels. In this industry, a
rebound in profits can quickly lead to unexpected losses when
air travel slumps. The charm of JetBlue is its rain-or-shine
business model. The carrier has been able to maintain a healthy
balance sheet and a lean cost structure, which has enabled
JetBlue to report an operating profit every year since 2001.
Larger carriers have a habit of losing loads of money whe the
economy is not at full bore. So if the economy sinks anew,
JetBlue is far better-positioned to weather the storm than its
larger brethren.
More than likely, though, the economy is headed for a rebound as
unemployment peaks and the process of job creation -- and
consumer spending -- starts anew. And JetBlue, with nearly $1
billion to spend, can continue to expand its route network,
while some of its larger peers must conserve cash in the face of
still-high debt loads.
So what’s the growth plan? For starters, JetBlue has emerged
as a key player in the Caribbean vacation market, serving an
increasing number of island countries from its Northeast and
Florida hubs. As tourism rebounds, the carrier can expand the
number of flights serving those destinations. In addition, the
company has shed some programs that were initially put in place
to win the heart of consumers. These days, you’ll pay much more
to make a last-minute flight change, and the company’s website
does a much better job of squeezing higher revenues on flights
where few open seats remain. The international expansion and
pricing changes haven’t yet perked up profits (thanks to the
double-hit of an energy spike and an economic crash), but they
soon will.
How tough has it been? In the third quarter of 2009, the average
paid fare was just $127, -11 % below year-earlier levels. But a
drop in fuel costs, and a sharp eye on other operating expenses
enabled the carrier to revert from a loss in the third quarter
of 2008 to a small profit in the same period a year later --
despite those lower seat prices.
Now, the trick is to boost ticket prices back to pre-recession
levels. That has already started in recent months, and thanks to
far fewer planes flying across the industry, it now looks as if
carriers, including JetBlue, will be able to push prices back up
over the course of 2010. If sales and profits start to rise as
expected, JetBlue is likely to move back on to the expansion
track.
The airline industry is very sensitive to demand. A plane that
is 70% full is a money loser, while a plane that is 90% full is
a big source of profits. JetBlue saw its load factor fall below
80% for the first time in 2009, yet still managed to eke out a
profit. In 2010, analysts expect the load factor to climb back
into the low 80s. Analysts also expect per share profits to
rebound back to the $0.40-$0.50 range -- impressive considering
2010 is likely to be a tepid year for economic growth and
consumer spending. By 2011, JetBlue’s profit picture could prove
even brighter.
-- David Sterman
Contributor
StreetAuthority |
