Yhg - Zacks Investment Research



|JetBlue Airways Corporation |(JBLU-NASDAQ) |$19.34 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 1Q18 Earnings Update; Earnings beat, revenues miss

Prev. Ed.: 4Q17 Earnings Update

Flash News Update [Note: earnings update in progress; final report to follow]

On Apr 24, 2018, JetBlue Airways Corporation (JBLU) reported first-quarter 2018 earnings per share of 27 cents surpassing the Zacks Consensus Estimate of 22 cents. The bottom line also increased 8% on a year-over-year basis backed by higher passenger revenues.

However, total operating revenues of $1,754 million fell short of the Zacks Consensus Estimate of $1,757.6 million. Nevertheless, the top line increased more than 9% from the year-ago figure. Passenger revenues, which accounted for bulk of the top line (96.5%), were up 8.7% in the quarter under review. Other revenues increased 39.9%.

Operating Statistics in Q1

Capacity, measured in available seat miles, expanded 3.3% year over year. Traffic — measured in revenue passenger miles — grew 4.1% in the reported quarter. Load factor (percentage of seats filled by passengers) also improved 70 basis points (bps) year over year to 84.6% as traffic growth outpaced capacity expansion in the three-month period.

Expenses

In the first quarter, total operating expenses (on a reported basis) increased 11.5% year over year mainly owing to high fuel costs. Average fuel cost per gallon (including fuel taxes) escalated 23% to $2.09. Moreover, JetBlue’s operating cost per available seat mile (CASM) was up 8% to 11.59 cents. Excluding fuel, the metric climbed 3.1% to 8.55 cents on account of a rise in labor costs.

Balance Sheet

JetBlue exited the quarter with cash and cash equivalents of $511 million compared with $303 million at the end of 2017. Total debt, at the end of the quarter, was $1,143 million than $1,199 million at the end of 2017. We note that this low-cost carrier is constantly working toward reducing its debt levels.

Outlook

For the second quarter of 2018, the carrier expects capacity to increase between 5% and 7%. The metric is still anticipated to increase in the range of 6.5-8.5% for 2018.

Consolidated operating cost per available seat mile, excluding fuel, is expected to grow in the band of 2-4% in the second quarter. For the current year, the metric is still projected in the range of -1% to +1% (year over year).

RASM movement is expected between 0% and -3% in the second quarter on a year-over-year basis. Second-quarter fuel cost, net of hedges, is anticipated to be $2.23 per gallon.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON JBLU

Portfolio Manager Executive Summary

JetBlue Airways Corporation (JBLU) is a passenger airline that operates primarily on point-to-point routes with its fleet of multiple Airbus A320 and 7 Airbus A321 aircraft along with multiple Embraer E-190 planes.

Of the 11 firms covering the stock, three provided positive ratings, seven assigned neutral ratings while one firm rated the stock negatively. The target prices range from $21.00 to $31.00, with the average being $24.30.

The following is a summarized opinion of the diverse brokerage viewpoints:

Cautious outlook (7/11 firms) – These firms are optimistic about JetBlue’s unique business model, strong brand name, enhanced in-flight services, fuel-hedging strategy, strong unit revenues and a non-unionized workforce. JetBlue’s growing presence in key markets, along with penetration into Latin America and the Caribbean, will likely support its growth momentum. However, increase in non-fuel costs and competitive pressure pose threats to the company’s earnings. According to the firms, the carrier’s effort to improve ancillary revenues has already been discounted into the share price, thus limiting the upside potential.

Bullish outlook (3/11 firms) – These firms expect the company to benefit from the introduction of Fly-Fi service, enhanced fare options, premium service offerings like Mint, ancillary services and the acquisition of slots at Washington Regan National Airport (DCA). The firms are encouraged by the company’s growing market presence in the Boston, Fort Lauderdale and Caribbean markets and its plans to increase capacity in profitable routes, as these markets bode well for near-term operational efficiency and margin growth. The firms believe that the company’s superior product offerings, coupled with its low-cost structure, would provide it with a competitive advantage leading to share gains in emerging markets.

Bearish outlook (1/11) – The firm is concerned about rising fuel prices and higher non-fuel unit costs that could adversely impact the company’s earnings going forward. Moreover, JetBlue’s operations are largely concentrated along the East Coast particularly in New York, Boston and Fort Lauderdale. So, any weather related disruption on the region can have a large scale impact on the carrier’s operations and thereby earnings.

The firms believe the following additional factors should also be taken into consideration for investing in the stock:

• JetBlue Airways is one of the few low-cost carriers in the U.S. that offer consumers excellent service at low fares.

• JetBlue’s strength lies in its strong brand value, superior in-flight services, which include LiveTV,.

• JetBlue faces significant competition from growing low-cost carrier Spirit Airlines, which operates in one of the former’s key markets – the Caribbean.

• JetBlue continues to maintain one of the best liquidity positions in the U.S. airline industry. The company’s balance sheet is healthy with manageable debt maturities and capital commitments. This solid liquidity position will allow the company to generate accretive return on invested capital.

• JetBlue does not pay any dividend on its stock.

General Outlook

The firms believe that JetBlue will continue to benefit from its low-cost structure and improving travel demand that bode well in the present economy. They remain encouraged by JetBlue’s expansion into new and untapped markets in Boston and the Caribbean. Further, growing partnerships, cost control measures, enhancing ancillary revenue opportunities and robust liquidity profile are expected to serve as long-term beneficiaries to the company.

Apr 04, 2018

Overview

Based in Long Island City, NY, JetBlue Airways Corp. is a low-fare passenger airline providing high-quality customer service. It provides high-quality customer service featuring all-leather seats and live satellite television (offering up to 36 channels of DIRECTV programming) in every seatback. Through its wholly owned subsidiary, LiveTV, LLC, the company provides in-flight entertainment systems for commercial aircraft, including live in-seat satellite television, digital satellite radio, wireless aircraft data link service, and cabin surveillance systems. JetBlue Airways operates a mixed fleet of Airbus and Embraer aircraft. Most of the company’s flights have an origin or destination point in one of its focus cities: Boston, Fort Lauderdale, Los Angeles/Long Beach, New York/John F. Kennedy International Airport (JFK), or Orlando.

Brokerage firms identified the following factors for evaluating the investment merits of JBLU:

|Key Positive Arguments |Key Negative Arguments |

|Strong Fundamentals: Efficient aircraft utilization with A320 and E190 |Competitive Threats: JBLU faces significant competition with respect to |

|aircraft providing capacity flexibility, revamping fare structure and |routes, services, and fares as well as at its hub airports. The company |

|renewed focus on operational improvements create a healthy platform for |competes with various domestic as well as international carriers for |

|the company’s growth. |passengers traveling within U.S. as well as between foreign points. |

|Growth Opportunities: Emphasis on increasing medium and short-haul |Macro Factors: Weather issues, terrorist attacks, economic slowdown and |

|flights with large passenger base and high fares from the Boston–New York |industry regulations tend to pose hurdles in the company’s growth |

|market, availability of new gates at JFK, capacity reduction by Delta and |trajectory. |

|the return to profitability initiative, present growth opportunities. |Technology Changes: JetBlue Airways is dependent on automated systems and |

|Competitive Position: Being a leading low-cost carrier with growing |latest technology to run its business, enhance customer service and achieve |

|network presence, JBLU has several competitive advantages. |low operating costs. These require upgrades or replacements periodically, |

|Non-Union Status A Huge Advantage: As one of the only non-union airlines |which involve implementation and other operational risks. |

|in the industry, productivity opportunities exist at JBLU that cannot be | |

|contemplated at its unionized peers. A cooperative workforce gives | |

|management the flexibility to manage its cost structure. | |

Further information on the company is available at its website: .

Note: JetBlue Airways’ fiscal year references coincide with the calendar year.

Apr 04, 2018

Long-Term Growth

JetBlue remains committed to deliver excellent customer service coupled with industry leading products, for long-term sustainable growth. The company will benefit from rising demand, schedule optimization, cost control, optimization of unit revenues, managed capital expenditures and disciplined growth. JetBlue is the only non-unionized airline in the industry with the flexibility to manage its cost structure.

On Sep 26, 2016, JetBlue Airways signed a deal with bio-energy company, SG Preston to buy hydro-processed esters and fatty acids (HEFA)-based renewable jet fuel from the latter and reduce carbon emissions. Under this agreement, JetBlue is expected to purchase over 33 million gallons of blended fuel per year from SG Preston over a period of 10 years. This deal is by far the largest, binding commitment for HEFA-based renewable fuel purchase over a long term by an airline company.

On Sep 22, 2016, JetBlue Airways announced that it has signed a unilateral codeshare agreement with Hyannis, MA-based Cape Air, expanding its partnership with the latter. Per this deal, JetBlue will be tagging Cape Air flights between certain destinations with its code “B6”. The agreement will be highly beneficial for customers as a single ticket can be used for flights operated by both airlines. Customers also stand to gain from ease of travel through options such as one-stop check-in and baggage transfer. The agreement will cover Cape Air flights operating between Boston and San Juan, which are important cities for JetBlue, as well as Cape Air destinations across northeast and the Caribbean. The JetBlue code for Cape Air flights operating between Boston’s Logan International Airport and San Juan’s Luis Muñoz Marín International Airport are already available for booking on JetBlue’s website.

With a low cost structure, the company continues to successfully expand its network footprint in major growth regions like New York, Boston, Fort Lauderdale and the Caribbean. The company has won bids to purchase takeoff and landing slots at Reagan National Airport (DCA) in Washington as part of the mega merger deal between American and U.S. Airways. The slot wins will allow the carrier to expand its operations to and from Washington. For the coming years, the company expects several Latin American and Caribbean markets to drive growth as those countries have remained underserved by other carriers. JetBlue currently serves 25 different countries in the Caribbean and expects almost one-third of its total network to come from the Caribbean and Latin American market.

JetBlue had the honor of operating the first U.S. flight to a Cuban city in more than 50 years. On Aug 31, 2016 the carrier’s flight (387) landed in Santa Clara from Fort Lauderdale. The carrier’s efforts to expand in Boston are also encouraging.

Airline partnerships are integral to JetBlue’s growth prospects. The carrier remains focused on partnering (codeshare, interline and baggage handling agreements) with both legacy and international carriers to enhance its services and take advantage of travel benefits.

JetBlue has also struck a one-way codeshare agreement with Qatar Airways and Etihad Airways. Further, JetBlue and Emirates extended their ongoing three-year partnership by including bilateral code sharing. JetBlue also entered into a bilateral code sharing pact with South African Airways. Per the agreement, both the airlines will interlink their networks through New York's John F. Kennedy International Airport and Washington's Dulles International Airport. In addition, the company’s recent agreement with British Airways will incorporate 18 daily transcontinental flights, covering more than 50 routes within the U.S. and over 100 destinations beyond London. Thus, the firms are of the view that such alliances would attract travelers with the promise of efficient service, wider networks, shorter routes and convenient travel timings.

JetBlue has also taken several steps to maximize the cost efficiency of its fleet that will eventually lower maintenance expenses to a certain extent. The company is either disposing off old aircraft or replacing old spare engines with new ones. The company is expected to purchase 3 Airbus A320, 48 Airbus A321, 30 Airbus A320 neo, 30 Airbus A321 neo, 24 EMBRAER E190 and 10 spare engines through 2022. The company also entered into a heavy maintenance and paint deal with Premier Aviation for its Embraer aircrafts in January 2017.

The new tax law is anticipated to have a positive impact on the company. The reduced tax rate will leave more cash in the hands of the company to fund their capital expenditures, acquisitions, share repurchases among others. In fact, JetBlue, like some of its rivals, carriers announced bonuses worth $1,000 per member, following the tax overhaul.

The carrier’s efforts to reward shareholders are encouraging. To this end, the company’s board of directors approved a new share repurchase program in December 2017. The new authorization permits JetBlue to buy back its common stock worth up to $750 million. The program spanning two years, commenced on Jan 1, 2018. The company’s shareholder-friendly moves will continue.

Apr 04, 2018

Target Price/Valuation

Provided below is a summary of valuation/target price:

|Rating Distribution |

|Positive |27.3%↑ |

|Neutral |63.6%↓ |

|Negative |9.1%↑ |

|Avg. Target Price |$24.30↑ |

|Max. Target Price |$31.00 |

|Min. Target Price |$21.00 |

|No. of Analysts with Target Price/Total |10/11↑ |

r

Recent Events

On Mar 12, 2018, JetBlue reported traffic figures for February 2018. Traffic, measured in revenue passenger miles (RPMs), improved 6.8% year over year to 3.69 billion. On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) also expanded 6.8% to 4.47 billion.

 

Load factor remained flat at 82.6% in the month as traffic growth was commensurate with capacity expansion.  The low-cost carrier registered a completion factor (system wide) of 98.4% in the month with 74.6% flights on schedule.

The carrier now expects first-quarter 2018 operating revenue per available seat mile (RASM) to improve 3.5-5.5%. Prior guidance was an increase of 2.5-5.5%.  For the first quarter of 2018, the carrier anticipates capacity to grow between 3.5% and 5.5%. The metric is further projected to increase in the 6.5-8.5% range for the current year.

On Jan 25, 2018, JetBlue reported 4Q17 financial results. Key highlights are as follows:

• Total revenue in 4Q17 improved 7% year over year to $1,756 million, meeting the Zacks Consensus Estimate.

• Fourth-quarter 2017 earnings per share of 32 cents missed the Zacks Consensus Estimate by 2 cents.

Revenues

Total operating revenue improved 7% year over year to $1,756 million, matching the Zacks Consensus Estimate. 

The top line was driven by a 16.9% increase in other revenues. Passenger revenues in the quarter under review rose 5.9% year over year to $1,564 million.

Capacity, measured in available seat miles, rose 5.1% year over year. Traffic, measured in revenue passenger miles, grew 3.1% in the fourth quarter. Load factor (percentage of seats filled by passengers) declined 160 basis points (bps) year over year to 83.1% in the reported quarter as traffic growth was outpaced by capacity expansion.

Yield per passenger mile improved 2.8% year over year. Passenger revenue per available seat mile (PRASM) inched up 0.8%. Operating revenue per available seat mile (RASM) increased 1.8%.

Outlook

For first-quarter 2018, the carrier expects capacity to increase in the band of 3.5-5.5%. For full-year 2018, the metric is expected to grow in the range of 6.5-8.5%.

JetBlue is constantly striving to expand operations. In keeping with expansion motive, the carrier had announced plans in April 2016 to expand its premium Mint service. This transcontinental service added destinations along the West Coast, including Los Angeles, San Francisco, San Diego and Seattle. Earlier in March 2017, the carrier had expanded Mint service to Fort Lauderdale with non-stop service to Los Angeles. It has also started Mint service from Fort Lauderdale to San Francisco. The carrier added 15 Mint A321 aircraft in 2017

The Mint premium service includes seats with additional room, early boarding, free Wi-Fi, special meals and a new entertainment system. Also, in Fort Lauderdale-Hollywood, the company continues to execute a profitable growth strategy with expanding services to both domestic and international destinations. JetBlue has also decided to charge bag fees and squeeze seats in a bid to boost revenues. Further, it expects the fare options platform to considerably drive the top line going forward.

JetBlue is thus successfully expanding products and services on board and on the ground to aid growth in ancillary revenues along with enhanced flexibility in ticket pricing. Also, JetBlue expects to generate solid revenues owing to the strong demand for Mint — its premium service offering on the busy New York-Los Angeles route. The firms believe that the increasing popularity of its Mint-based service will drive revenues for the company, moving ahead. Also, these firms opine that Mint’s attractive fare pricing is expected to provide JetBlue with an edge over some legacy carriers.

JetBlue’s industry leading high-speed broadband Wi-Fi product, Fly-Fi, is now available in all A321 aircrafts and in 90% of the company’s A320s. Meanwhile, partnerships with the likes of Amazon and Major League Baseball should bolster the product portfolio of the company.

The firms also specifically believe that there exists a lot of potential for expansion of operations in Latin America and the Caribbean and the carrier remains committed to growing presence and building momentum across the aforementioned markets. The carrier’s investment in Boston is also paying off well. Going forward, the company expects to add new routes from Boston. The company has added services to Syracuse in January 2018 and is planning on adding another one to Minneapolis in May. JetBlue believes targeted growth is critical for its plan to improve financial returns over the long term as demonstrated by the company’s success in growing capacity while also improving margins in Boston, San Juan and Fort Lauderdale.

Margins

In the fourth quarter of 2017, total operating expenses (on a reported basis) climbed 16.5% year over year. Average fuel cost per gallon, inclusive of fuel taxes, escalated 21.6% to $1.99. JetBlue’s operating expense per available seat mile (CASM) increased 10.8% in the reported quarter to 11.29 cents. Excluding fuel, the metric rose 8.1% to 8.83 cents.

Outlook

Consolidated operating cost per available seat mile, excluding fuel, is expected to grow in the band of 2-4% in the first quarter of 2018. For 2018, the metric is estimated to increase between -1% and +1%. During the period between 2018 and 2020, CASM, excluding fuel, is targeted in the range of flat to 1%.

Management remains committed to improve margins in 2018, backed by cost control measures, capacity adjustments, maximization of revenues, low fuel costs and a strong balance sheet. One of their top priorities is to implement a structural cost program to realize $250-$350 million of savings in 2020 and thus provide operational efficiency. In 2018, JetBlue plans to continue investing in Boston, Fort Lauderdale, and the West Coast to maintain above-average industry margins. The firms expect a strong demand for Mint to significantly improve transcontinental margin performance. Also, they expect management’s increased focus on product monetizing to boost margins. However, JetBlue expects competitive capacity pressure in various areas of network, which may hurt margin opportunities from time to time.

Earnings per Share

In fourth-quarter 2017, earnings per share of 32 cents fell short of the Zacks Consensus Estimate of 34 cents. 

Outlook

The carrier expects RASM (revenue per available seat mile) to improve 3.5-5.5% in the first quarter. Prior guidance was an increase of 2.5-5.5%. Low fuel prices as well as the company’s cost control measures should boost the bottom line going forward. In addition, most firms believe that a strong demand for JetBlue’s premium service offering, Mint, should meaningfully contribute to its earnings. On the other hand, the firms remain skeptical about increased maintenance costs coupled with high fixed expenses and stiff price competition, which may also affect the bottom line.

|Research Analyst |Eshani Haque |

|Copy Editor |Pramita Bose |

|Content editor |Maharathi Basu |

|Last updated by |Eshani Haque |

|Reason for Report |Earnings |

-----------------------

May 3, 2018

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download