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JBLU AT A GLANCE

P/E ► -150   EV/EBITDA ► 14.1 AVG ROA ► 2.6% AVG ROE ► -0.7% AVG Debt to Equity ► 3.32 AVG Current Ratio ► 1.27 AVG Interest Coverage Ratio ► 1.17 AVG

 

 

 

 

 

 

JetBlue Airways Co. (Nasdaq:JBLU) is the 8th largest airline in the U.S. by revenue passenger miles (aggregate number of miles flown by total passengers). JetBlue differentiates itself from other Airline Travel companies with its low fares, made possible by low distribution and operating costs - the company's Cost per Available Seat Mile (CASM) was 8.38 cents in 2007, the lowest in the airline industry.^[1] This continued in 2008, as JetBlue once again had an industry-low CASM, excluding fuel expense of 5.94 cents.^[2] However, in 4Q08, the company's CASM rose to 10.2 cents, still lower than the industry average of 14.9, but no longer the lowest.^[3]

Volatility in oil prices, however, puts JetBlue's low cost model at risk. JetBlue paid an average $2.98 per gallon of fuel in 2008^[4], a 43% increase from $2.09 per gallon of fuel in 2007^[5], and spent 45% more in fuel expenses during 2008 than in 2007.^[4] To protect itself from rising fuel prices, the company typically hedges approximately 30% of its annual fuel needs, which is about the industry average.^[6] Yet, due to declining crude oil prices during 4Q08, at year-end 2008 JetBlue had only secured 8% of its 2009 fuel needs in hedging agreements^[7] and thus expects fuel costs to decrease to about $1.99 per gallon in 2009^[8], which will decrease its CASM 5%-7% during the year.^[8]

JetBlue has continued to expand its capacity or available seat miles (ASMs) during 2006-2008, a period in which many competitors reduced their ASMs. In 2008, for example, JBLU increased its ASMs by 1.7%, spurred by a 4.4% growth in flight departures during the year.^[4] Following this growth in ASMs, JetBlue's revenue grew by 19.2% in 2008, reaching $3.3 billion.^[4] This was boosted not only by more seating capacity, but the company's efficient use of it - the company's 80.4% load factor in 2008 meant it used a greater percentage of its aircraft than its rivals^[4], for example Southwest Airlines Company (71.2% load factor in 2008).^[9]

Business Overview

JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.^[2] JBLU is the 8th largest airline in the United States by revenue passenger miles, operating 600 flights daily.^[2] The company is able to maintain its industry-low CASM, excluding fuel expense of 5.94 cents through aircraft efficiency and distribution costs. It has the youngest aircraft fleet in the industry with an average age of 3.6 years in 2008, which reduces maintenance expenses, and it operates its aircraft for 12.1 hours a day, which is the highest in the industry.^[2] Also, in 2008, over 77% of sales were booked through its website, which reduces operating costs.^[2] Most of its flights originate from five main airports, including Boston, Fort Lauderdale, Long Beach (CA), New York City, and Washington D.C, with New York City's JFK airport as its primary operating airport.^[2] In 2008, JetBlue represented the largest domestic airline operating at JFK airport by passengers enplaned.^[10] JBLU's average fare in 2008 was $139.40, second-best to Southwest's average $119.16.^[4]

JBLU's key operating metrics are shown below:

Like its competitor Southwest Airlines, JetBlue offers low fares while maintaining low operating expenses through low distribution costs, high employee productivity, and use of only two types of aircraft in its fleet.^[12] For example - in 2008 JetBlue employed approximately 99 employees per aircraft^[13] significantly less than other major airlines, which employ an average of 127 employees per aircraft, but more than Southwest, which employees 89 people per aircraft.^[13]

Financial Analysis

JetBlue earned $3.388 billion in revenue in 2008, 19.2% more than in 2007.^[14] JBLU's 2008 revenue represents a 239% growth in revenue since 2003, as the company has expanded by adding new routes and increasing the frequency of preexisting flights - in 2008, for example, Revenue per ASM (RASM) increased 17.2%.^[14]

JetBlue's operating expenses grew faster than did its revenue in 2008, increasing 22.7% to $3.279 billion.^[14] Increased fuel consumption as well as increases in fuel prices led to a 46% jump in JetBlue's fuel expenses.^[15] JBLU's average cost of fuel per gallon increased 43% in 2008, reaching $2.98 per gallon, compared to $2.09 a year earlier.^[4] This increase in fuel expenses spurred an approximate 20.6% increase in the company's Cost per Available Seat Mile (CASM) in 2008, to 10.11 cents.

Overall, the company operated at a 3.2% operating margin in 2008 and had a $76 million net loss, down from a gain of $18 million in 2007.^[16] Because JetBlue only hedges about 30% of its annual fuel needs^[6], the company is vulnerable to increases in fuel costs. The significant decline of crude oil prices during 4Q08 led to to JetBlue decreasing its exposure to hedges, and as a result, only 9% of its expected fuel consumption is hedged for 2009.^[17] In 2009, JetBlue expects that the average cost of fuel will return to 2006 prices of $1.99 per gallon.^[8] As a result, the company's Cost per Available Seat Mile (CASM) is expected to decrease by 5% to 7%.^[8]

Like its chief competitor Southwest Airlines Company (LUV), JetBlue reported net income in 2Q09. Overall, the airline had net income of $20 million and operating income of $76 million, and was able to decrease costs from $838 million in 2Q08 to $731 million in 2Q09.^[18] This operating expense decrease can mainly be attributed to a 38% fall in JBLU's average cost per gallon of fuel, from $3.17 to $1.97, a trend that can be seen throughout the airline industry.^[18]

JetBlue remained one of the few profitable airlines in 3Q09, with operating income of $66 million and net income of $15 million, which represent improvements of $44 million and $23 million, respectively, as compared to 3Q08.^[19] While a 37.6% decline in fuel expense in 3Q09 (and 39.7% fall in average fuel price per gallon) helped temper operating expenses, revenue fell as well--from $902 million to $854 million--as a result of slumping demand for air travel.^[19] Although departures rose by 8.4%, to over 55,000, JetBlue cut its average fare by 10.9%, to $127.04, to remain competitive in light of the global economic recession.^[19]

Trends and Forces

Increases in Fuel Prices Hurt Financial Performance

Like all other airlines, JetBlue is vulnerable to increases in fuel prices, as fuel represents a vast majority of airlines' operating expenses. In 2008, JBLU's average cost of fuel increased 43% from 2007, reaching $2.98 per gallon, from $2.09.^[6] This increase in fuel costs contributed to an approximate 45.53% increase in the company's fuel expenses in 2008.^[5] Overall, fuel expenses represented 41.23% of JetBlue's total operating expenses in 2008, up from 34.8%, 33.6% and 29.5% in 2007, 2006 and 2005, respectively.^[6] This increase in fuel expenses spurred an approximate 43% increase in the company's Cost per Available Seat Mile (CASM) in 2008; however, CASM, excluding fuel expense, still increased by 9%.^[1]

To mitigate its vulnerability to increases in fuel prices, JetBlue enters into annual hedging contracts, securing about 30% of each year's projected fuel needs at a particular price.^[6] This hedging strategy is about average in the airline industry, where most airlines have between 20% and 30% of their 2008 fuel needs hedged at around $100 per barrel, or about $2.38 per gallon.^[20] At the beginning of 2008 however, JBLU had only secured 13% of its fuel needs through hedging agreements.^[6] As a result, the company believes that its average price of fuel will jump to $2.55 per gallon in 2008, resulting in a 10% to 12% increase in CASM during the year.^[21] Moreover, although Available Seat Miles (ASM) decline by 1.7%, JBLU had 5.1% more departures and 8.2% lower fares as the company tried to offset the drop-off in demand due to the global recession.^[18]

Aging Fleet Leads to Rising Operating Expenses

One of JetBlue's main cost-saving advantages is its "young" fleet, which has an average age of 3.6 years^[2] compared to an average age of 10.1 years for Southwest's fleet.^[22] Because of its youthful fleet, JetBlue's maintenance and repair costs are incredibly low, totaling $127 million, or roughly 3.75% of JBLU's revenue in 2008.^[23] In contrast, Southwest spent $616 million, or 6.54% of its revenue on maintaining its older fleet in 2008.^[24] As JetBlue's fleet continues to age, however, its maintenance expenses will begin to climb, which will reduce the company's operating margin.

Dependence on New York Metropolitan Market Jeopardizes Operations

JetBlue relies heavily on the New York area, with approximately 62% of its daily flights having an airport in the New York market as either an origin or a destination.^[25] As a result, JBLU is vulnerable to delays or cancellations caused by airport congestion or inclement weather, which hurts the company's operating performance and customer satisfaction. Moreover, JBLU remains susceptible to regulation by the Federal Aviation Authority (FAA) and Department of Transportation (DOT). On October 10, 2008, the DOT announced the Congestion Management Rule for JFK and Newark International Airport, which limits the number of scheduled operations unless JBLU and other airlines obtain a slot. Also, 10% of slots already issued have been confiscated to be auctioned.^[25]

In the past, weather in New York has had a significant impact on JBLU's operations as well. In Q1 2007, for example, an ice storm in the New York region caused the cancellation of 1,200 JetBlue flights over a 6 day period,^[26]costing JetBlue $30 million in lost passenger revenue.^[27] After its Q1 2007 debacle, however, JBLU implemented several new initiatives aimed at reducing its vulnerability to similar events in the future. For example, the company implemented preemptive cancellations for severe weather and instituted a compensation program for customers on canceled or disrupted flights.^[26]

JetBlue Differentiates on Low Fares and Emphasizing the Customer's Experience

JetBlue's self-proclaimed mission is to "bring humanity back to air travel" and create a travel experience which it calls the "JetBlue Experience", meaning customer-friendly employees, new aircraft, comfortable leg space, and personalized television screens that offers 36 channels of DirecTV, and XM satellite radio.^[10] The company continues to prioritize the customer's experience - in June 9, 2008 JetBlue acquired the Airfone unit from Verizon which it will use to improve its inflight Wi-Fi internet service.^[28] JBLU was named the "Best Domestic Airline for Value" by Travel + Leisure magazine in 2007.^[12] Furthermore, a 2007 Consumer Reports National Research Center survey reported that JBLU had the highest customer satisfaction ratings of any U.S. airline.^[12] The accolades continued in 2008, as JetBlue was named the Top Low Cost Airline for Customer Satisfaction by J.D. Power and Associates for the third straight year.^[29] Finally, in 2008, Zagat awarded JetBlue the Best Large U.S. Economy Class, Best Inflight Entertainment, and Most Eco-Friendly and on December 19, 2008, JetBlue became the official airline of the Boston Red Sox, a Major League Baseball team .^[29]

Competitors

JetBlue competes against many low-cost carriers or low-cost subsidiaries of larger carriers. JetBlue's main low-cost carrier competitors are AirTran Holdings (AAI) and Southwest Airlines Company (LUV). Its other competitors include American Airlines (AMR), Continental (CAL), United (UAUA), and U.S. Air (LCC). JetBlue's CASM of 8.38 cents are the lowest in the airline industry, allowing the company to remain profitable as many competitors struggle. However, due to rising costs and slumping demand, JetBlue joined many competitors in implementing various strategies including cutting food and beverage services and charging customers extra fees for checking in baggage to improve their profitability in 2008.^[30] Competitor Southwest remains the only major airline without extra fees as of Q3 2008, although JetBlue's $20 fee for a second checked bag is much less than most airlines- for example, American Airlines charges customers $15 to check-in one bag, and $25 for the second piece of luggage.^[31]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8} JBLU 2007 10-K, Item 6, pg. 26
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} JBLU 2008 10-K, Item 1, pg. 1
3. ↑ Bureau of Transportation Statistics. Fourth-Quarter 2008 System Airline Financial Data
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} JBLU 2008 10-K, pg. 24
5. ↑ ^{5.0 5.1} JBLU 2007 10-K, pg. 31-32
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5} JBLU 2007 10-K, pg. 11
7. ↑ JBLU 2008 10-K, Item 1, pg. 8
8. ↑ ^{8.0 8.1 8.2 8.3} JBLU 2008 10-K, pg. 28
9. ↑ LUV Wikinvest Page
10. ↑ ^{10.0 10.1} JBLU 2008 10-K, Item 1, pg. 4
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5 11.6} JBLU January 2009 8-K  
12. ↑ ^{12.0 12.1 12.2} JBLU 2007 10-K, Item 1, pg. 3
13. ↑ ^{13.0 13.1} MIT Airline Data Project
14. ↑ ^{14.0 14.1 14.2 14.3} JBLU 2008 10-K, Item 6, pg. 23
15. ↑ JBLU 2008 10-K, pg. 29
16. ↑ JBLU 2008 10-K, Item 7, pg. 26
17. ↑ JBLU 2008 10-K, Item 7A, pg. 41
18. ↑ ^{18.0 18.1 18.2} JBLU 2Q09 10-Q
19. ↑ ^{19.0 19.1 19.2} JBLU 2009 3Q 10-Q
20. ↑ "Southwest Airlines reaps benefits of fuel hedging strategy" 5/30/2008
21. ↑ JBLU 2007 10-K, Item 7, pg. 31
22. ↑ LUV 2008 10-K, Item 2, pg. 14
23. ↑
24. ↑ LUV 2008 10-K, pg. 45
25. ↑ ^{25.0 25.1} JBLU 2008 10-K, Item 1A, pg. 14
26. ↑ ^{26.0 26.1} JBLU 2007 10-K, Item 7, pg. 28
27. ↑ "JetBlue cancels all New York area flights" CnnMoney.com 3/16/2007
28. ↑ "JetBlue Improves Wireless Internet Onboard" bnet.com 6/10/2008
29. ↑ ^{29.0 29.1} JetBlue. Our History.
30. ↑ "Big Airlines Cut Service And Add Fees" NY Times 11/2/2008
31. ↑ AA.com Baggage Allowance Page
32. ↑ ^{32.0 32.1 32.2 32.3 32.4 32.5 32.6 32.7} Air Transport Association 2008 Economic Report Pg. 23
33. ↑ Wikinvest Fuel Cost per Gallon Page
34. ↑ AAI Wikinvest Page
35. ↑ AMR Wikinvest Page
36. ↑ CAL Wikinvest Page
37. ↑ DAL Wikinvest Page
38. ↑ JBLU Wikinvest Page
39. ↑ UAUA Wikinvest Page
40. ↑ LCC Wikinvest Page