Shares of commercial airline company JetBlue (JBLU) were up 45% in 2013. Despite this huge rise, shares of JetBlue continue to be undervalued as they expand in new regions and expand new add-ons for customers. The biggest catalyst for the company could be unlocking value in subsidiary Live TV.
On December 12th, JetBlue announced a game changing launch of Fly-Fi on several of its aircraft. JetBlue became the first airline to use high-speed Ka-band satellite connectivity. Ka-band satellite, a service from ViaSat Inc. (VSAT), provides internet connectivity that is 8x faster than other airlines, according to the press release. JetBlue offers this new internet service free to all customers during the current beta rollout through June 2014. A faster service called Fly-Fi Plus is available for $9 an hour.
While it has not been determined how much JetBlue will charge for its internet service, it will likely be less than that of Gogo (GOGO). Now I will admit that I have been a bull of Gogo since its IPO and as recently as November. However, after reading through the releases of Fly-Fi and seeing demonstrations of how fast the connection is, I think Gogo shares might have further to fall as their pricing is too high to keep up with new competitors.
JetBlue seemed extremely pleased with the new offering by saying, "This is a great day for JetBlue customers as we provide the latest reason to choose JetBlue over the competition, in addition to our low fares, most legroom in coach, free snacks and award winning customer service." JetBlue also takes a zing at its competition with this, "As with all of JetBlue, our standard free offering beats their paid extras." To also take on competition, JetBlue is encouraging its Fly-Fi users to test their speed at speedtest.net and post the results on Twitter using the hashtag #WiFiFlightSpeed.
Fly-Fi will also beat competition as ViaSat can also operate on the ground, which takes advantage of new FAA rules for electronic usage. ViaSat is FCC licensed for the operation on Airbus 320 and Boeing 737. JetBlue spent the last two years on Fly-Fi and has now launched on five planes, as of the end of 2013. By the end of 2014, JetBlue will have 140 aircraft with Fly-Fi. According to JetBlue, the company will upgrade its entire Airbus fleet at a rate of 15 per month. In 2015, JetBlue will complete an update to its E190 fleet.
Concerning ViaSat, the company could get a huge lift from this Fly-Fi service. JetBlue is serving as the test for this new internet connectivity on commercial aircraft and will prove a key partner as it updates its aircraft to include ViaSat components. For a more detailed look at ViaSat, I invite you to check out the work of Mike Arnold who has a more detailed profile of the company.
Perhaps the biggest catalyst for JetBlue and the reason for my bullishness is Live TV. JetBlue acquired the company in 2002 after a two-year partnership on its aircraft. JetBlue paid a total of $81 million for Live TV, including debt. Live TV is the world's leading provider of live in-flight entertainment and connectivity systems for commercial airlines.
Live TV is currently offered by several additional airlines other than JetBlue. Here is a look at those companies and their products (year started):
· United Airlines (2007): In-seat entertainment, DIRECTV, Ka-Band
· WestJet (2003): In-seat entertainment, Bell
· Frontier (2002): In-seat entertainment, DIRECTV
· Azul (2008): In-seat entertainment, Sky Brazil
· Virgin Australia (2006): In-seat entertainment, FoxTel Digital
· Alitalia: In-seat entertainment
Live TV has FAA certification to install its products on the following aircraft:
· Airbus A318, Airbus A319, Airbus A320, Boeing 717-200, Boeing 737-600, Boeing 737-700, Boeing 737-800, Boeing 737-900, Boeing 737-900ER, Boeing 757-200, Embraer E145, Embraer E190, Embraer E195, Douglas DC9
Live TV offers in-flight entertainment products including: seat back solutions, regional live television, global live television, wireless video solutions and regional satellite radio. The company also offers connectivity through Ka-band broadband, mulit-brand broadband and LiveAero.
Live TV was founded in 1998. There are currently over 90,000 seats on more than 638 aircraft around the world that are equipped with products from Live TV. There is the potential of a spinoff of Live TV into a separate company. I believe this would allow Live TV to actively pursue new contracts with other airlines who may be hesitant to work with JetBlue. This would create huge value for JetBlue shareholders as the subsidiary is buried in JetBlue and doesn't get high valuation. Here was a question asked about a spin-off during the fourth quarter earnings call:
Question: "I guess, first off, we are seeing some of the - some of your competitors introduce Dish TV and other in-flight entertainment systems. So as the competitive landscape for in-flight entertainment appears to be changing, that, of course, raises the logical question of whether now or is the right time or not to potentially spin off LiveTV. So I guess I wondered if you could help us understand how the strategic landscape may or may not be affecting your thinking about the best way to unlock value from LiveTV from where we sit today?"
Answer: "It's Mark (Mark D. Powers-Chief Financial Officer). By the way, the whole notion that other airlines are adopting this product is not bad news, particularly from the LiveTV perspective. It is - if you had - if you'd not had the opportunity to fly Ka, we urge you to do so. It is a knockout. Connectivity is just such an important product for us. But to that point, as you think about LiveTV, the in-flight entertainment and now obviously the connectivity aspects are core to the JetBlue brand. But you don't need actually own the company to maintain that the ability to retain that core aspect. And so, we will continue to look at, as we move forward, strategic options that are obviously in the best interest of, amongst others, our shareholders. So there we are. It's great. I can't say how excited I am that we have that product now up in the air, that we have 10 airplanes and 15 per month being modified with that connectivity. It's an absolute knockout."
As you can see, JetBlue has made no announcement" of a spin-off, but the company isn't denying it could be a possibility. By Powers saying that "you don't need actually own the company,I think it sets up nicely for a move down the road. I could also see an activist investor get involved here and try to force the company to spin-off Live TV to unlock shareholder value.
JetBlue serves 30 million customers a year in over 80 cities. The company offers 750 daily flights, a number that is set to grow in 2014. JetBlue is expanding in areas like Detroit, Savannah and Port of Spain (Trinidad and Tobago). JetBlue has a strong presence in New York, Boston, Ft. Lauderdale, Los Angeles, Orlando and San Juan. One area set for a strong presence for JetBlue is Washington, D.C.
On January 30th, JetBlue announced it had secured 12 slot pairs for Reagan National Airport in D.C. Along with the new slot pairs, JetBlue will get full ownership of 8 slots that it had been temporarily using since 2010. Once the new slots are approved, JetBlue will add 12 new round trip flights at Reagan National, creating a new daily total of 30 round trip flights. This will give JetBlue a nice market share in Washington, D.C., which could become one of its key markets.
Another potential catalyst for JetBlue in 2014 is the introduction of its Mint premium service. JetBlue aims to get a share in the premium seating market by offering new amenities on its flights from New York to Los Angeles and New York to San Francisco. Custom perks will be lie-flat seats, a tapas style menu, 15 inch flatscreen television and customized amenity kits from Birchbox. Suites will also have doors that can be shut.
With this move to premium seating, JetBlue hopes to tackle the low reward holders and businesses that are currently at the bottom of the reward totem pole at other airlines. JetBlue will also update the coach area of its planes with self-service snack bars and roomier seats. Live TV will also be expanded to 100 channels, from a current 36. All of these upgrades should help JetBlue maintain or gain share in the middle market that it currently serves. Mint will roll-out on June 15th and could provide additional revenue for JetBlue in the second half of the fiscal year.
JetBlue shares made a big move in 2013 but are not done rising. Shares have not hit double digits since 2007, which is a mark I believe shares will pass in 2014. The company will see earnings and revenue rise from upcoming catalysts of additional regional routes, new wi-fi offerings and Mint premium seating. On top of that, investors are getting an investment in Live TV, a company that is the best of breed and should see increased contract backlog from other airlines and a potential spin-off. Live TV's motto is "At Home in the Air." I believe JetBlue shares will be at home in your portfolio.