JBLU - As Margin Improves JetBlue Airways Looks Like A Rebound Opportunity

2024-01-16 01:47:09 ET

Summary

• JetBlue Airways has faced significant financial challenges due to the Covid-19 pandemic, resulting in plummeting operating margins and losses per share.
• The company has focused on attracting business travelers and visitors to maintain a steady flow of customers throughout the year.
• JetBlue's attempt to acquire Spirit Airlines has faced skepticism, leading to a decline in stock prices. The company's profitability and fuel costs remain key concerns.

The Covid-19 pandemic absolutely slaughtered a lot of stocks. With interest in travel plummeting over fear of catching it, few were more vulnerable than airlines. Today, we’ll look at one such company, JetBlue Airways (JBLU).

Starting their flights in 2000, the low-cost carrier of choice on the US East Coast was the darling of the airline industry. Then Covid-19 happened. Operating margins plummeted and loss per share grew to a terrifying level in 2020-2021. But what does it look like now?

Understanding JetBlue

They’re not a huge company, but JetBlue has tried to be a competitive player in the airline industry with low-cost, higher amenity flights. In an effort to keep the company from suffering the usual seasonality problem, they’ve focused largely on business travelers as well as friends visiting people, both of which are going on pretty much evenly all year.

That’s not to say JetBlue has been free of problems. 9/11 scared away some travelers, though JetBlue was one of few companies to remain profitable. High fuel costs in 2007 were a problem, and a familiar problem they are also experiencing during the current economic problems.

Finally Covid-19 hit, and the company was badly beat up, falling to unprofitability for several years. In the most recent 10-K, JetBlue predicted improving margins and a return to profit in FY2023, but high fuel costs have kept that from panning out, and margins, while not hugely negative, are still negative enough to prevent profit.

As you can see, the company has become more Caribbean and Latin America-centric, with a lot of flights headed down there. They’ve started crossing the Atlantic too , chiefly to England, but that is a relatively small portion of their flights.

Trying to grow their fledgling low-cost airliner, JetBlue has also tried to buy out Spirit Airlines. This ultimately led to an ugly antitrust battle , ironic since they’re nowhere near a monopoly, judges though argued the buyout would raise flight prices in general.

There is yet to be a decision on the Spirit merger, though there is a fair bit of pessimism about the prospects, and it’s been driving JetBlue to an even lower stock price in recent days.

By the Numbers

(source: most recent 10-Q from SEC)

At this point, the price/book value suggests the company is a veritable bargain. The reason for that is cold feet from investors, reasonably because JetBlue spent years a far distance from profitability. If they really can get back to the positive in that regard, it would look very good for those buying at current price/book.

Whether they can actually do that at this point is the billion-dollar question, especially if the Spirit merger gets shot down. That’s not to say that JetBlue can’t make a go of it on their own, but the plan was to do so with Spirit, not without them.

Profit and high cash flow enjoyed in the previous decade has left JetBlue not so vulnerable, with the cash and equivalents still several dollars per share. Debt is still $3.7 billion, paid down from $4 billion.

The Risks

Then there are risks, of which there are unfortunately many. We’ve already seen the damage done by Covid-19 in the past, and another variation on the virus is always a potential problem, if it’s big enough to scare away travelers. Now people are starting to get used to Covid, and are starting to take the threat in stride, but if death tolls start rising again, that could very much change.

JetBlue also enjoys a strong reputation, and airline reputations can disappear in the blink of an eye in a crash or other high profile incident. You can’t buy that sort of reputation, but you can even, through no fault of the management, lose it.

Competition is also a thing. JetBlue remains comparatively low cost, though with fares up 16.4% in 2022, an attempt to try to make up for the next big risk, fuel problems, it could give the bigger airlines a chance to sneak into their consumer base.

In 2022-2023, fuel prices are the biggest concern though. JetBlue, like everyone else, is using standard jets that use standard fuel, and those prices more than doubled from the 2020 levels. They have fortunately come down a bit in FY2023, but still remain relatively high, which is affecting profit margins.

Margins and Growth

(source: 10-K and 10-Q, SEC)

This is the perfect example of just how bad 2020 was for revenue, and what harm was done to their usually upbeat margins. It’s taken years, but 2022 and 2023 are closer to what you want to see in both regards, but the high fuel prices are still preventing a return to profitability.

JetBlue did an admirable job in paring away losses in 2021, despite all the problems with travel at the time. This shows a solid strategy on their part, though they ultimately have no control over what fuel prices look like, and that will always be putting pressure on them.

Negative a couple percent margins isn’t terrible, but getting that to a positive number would go a long way to showing the rebound of the company is a real thing. Once that happens, there’s no justification for such a low price to book.

(source: 10-K and 10-Q, SEC)

The wages of the margins of the last two years are a positive operating cash flow. That’s good news, though sadly the capital expenditures end of things dragged it back down to a net negative. Fortunately, the cash on hand can bear a bit more of that, and hopefully a return to profitability will allow them to get back to paying down debt and rebuilding their war chest.

Conclusion

It’s tough to figure the fair market value of JetBlue right now, with so many unknowns sitting there regarding Q4 and the antitrust case. I certainly wouldn’t be selling without a good reason though, so I’m putting this safely at hold.

Which isn’t to say I’m not open to buying some shares. If the Spirit case goes south, as seems at least a strong possibility, the near-term value could get even cheaper, and that could serve as an excellent opportunity to get some shares for speculation on a rebound.

Getting to profitability has to be job one for the company, and once they are there could be quite a bit of money to be made. Once again the risks are grand enough that I wouldn’t sell the farm to buy up shares, but having a few in your long-term holdings isn’t a terrible idea.

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