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Summary

  • JetBlue's growing partnerships has made it a virtually global airline.
  • The company could see strong earnings growth in near term as it benefits from more predictable maintenance costs and more efficient aircraft fleet.
  • LiveTV sale likely to unlock value for shareholders in the form of dividend or stock buyback.

While the airline industry has improved and become more profitable in the last few years, JetBlue (NASDAQ:JBLU) has been one of those troubled carriers that appear to be jumping from one crisis to another. It has dealt with hurricanes, soaring costs, delays and, more recently, flight cancellations. Consequently, the company fell short of its targets in the last two years. Be that as it may, the airline is expected to report solid earnings in 2014 and beyond. Absurd? Not really, let me tell you why.

Simplifying business while growing network
On March 13, JetBlue announced the sale of its wholly owned subsidiary LiveTV to Thales Group for $400 million, almost five times what it paid in 2002. LiveTV is the leading provider of in-seat entertainment for JetBlue and other commercial airlines. Partnering ViaSat, it introduced Ka-band satellite-driven onboard connectivity, a game-changing technological advancement. JetBlue clearly has a certain edge over others in terms of in-flight entertainment, with passengers increasingly inclined to stay connected and interact with both social media and professional networks while travel. The event highlights JetBlue's intent of keeping things simple and, regardless of the sale, it retains access to LiveTV's technology.

In addition, the airline has a strong network that is growing with time. This is mainly because of its presence in key markets, particularly in Boston and New York, that positions it favorably in the industry and, in turn, allows it to draw agreements with other airlines. As a matter of fact, it is the largest domestic carrier at New York's JFK Airport and a top carrier in Boston. Therefore, partnering with JetBlue is an advantageous proposition for many international carriers to pick up connecting traffic in both cities. Not to mention, with razor-thin margins many airlines serve the region unprofitably, thereby look for opportunities to reach potential customers through partnership networks.

JetBlue has come a long way from its first partnership with Aer Lingus in 2007. In seven years, it has inked 30 more partnership agreements, mostly with foreign carriers. Its key partners include Emirates, Etihad Airways, Icelandair, British Airways, Japan Airlines, Lufthansa, China Airlines, Asiana Airlines and LATAM Airlines. These partnerships help JetBlue to generate incremental revenue in the form of passengers connecting from its flights to international flights.

Keeping costs low
While the overall airline industry has been performing well of late, JetBlue missed its earnings target last year. Its gains were negated to some extent by a massive 28% increase in costs for maintenance, mainly due to Embraer (NYSE:ERJ)-190 engine problems. However, to tackle the issue, it contracted engine manufacturer General Electric (NYSE:GE), which is likely to bring greater predictability to maintenance costs that would benefit the company during the first half of this year.

In addition, the company is shifting away from the E-190 to more cost-effective Airbus aircraft. It plans to increase its A321 fleet from four aircrafts at present to more than 80 by 2020. Clearly, these moves will benefit the company in future by cutting or keeping its costs low.

Ready to return cash to shareholders
With many airlines having started or considerably raised their regular dividends, the airline industry is becoming more rewarding for the shareholders of late. Alaska Air (NYSE:ALK), Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) are among many others to sport this new shareholder-friendly trend. After all a dividend speaks volumes of the company's fundamental health and its confidence in its long-term profitability.

In recent years, several major airlines have shown consistent profitability, while generating positive free cash flows. JetBlue has markedly lagged its peers in this aspect as it hasn't always generated a positive free cash flow. Nevertheless, things seem to be improving of late. The airline ended 2013 with roughly $627 million in unrestricted cash and short-term investment, not to mention its undrawn lines of credit, allowing access to another $550 million. For full-year 2013, it generated $758 million of operating cash flow and had capital expenditures of $637 million. Accordingly, it generated $121 million in free cash flow in 2013 compared to ($128) million in 2012.

JetBlue has reduced its debt load by approximately $550 million since 2011 and increased its pool of unencumbered aircraft from one to 23, thus decreasing the financial risks in the business. Apart from reduction of debt and capital lease obligations, it has prepaid roughly $94 million of aircraft related debt last quarter. As a result, it recorded a $3 million loss in non-operating income during the quarter, however, it expects the transaction would generate $25 million in interest expense savings over the next six years. In addition, the proceeds of its recent sale of its LiveTV business will allow it to further reduce its debt burden while continuing to invest in its aircraft fleet for its growth plan.

With improving cash flows and more reasonable debt load, the airline will be in a strong position to start paying a dividend to its shareholders, possibly towards the end of this year. Alternatively, it could also choose to resume its share repurchase program. Either way, the likelihood of it returning cash to its shareholders is considerably more now.

Bottom line
With as many as 31 partnership agreements, mostly with international carriers, JetBlue is virtually a global airline. The company has reduced its risks and made moves to bring more predictability to its costs in order to boost it revenues. It is also transitioning to a more cost-efficient fleet of aircraft, which would further hold its costs down. With a strengthening balance sheet, it should be able to return cash to shareholders while still investing in its future growth.

Source: Set To Fly High: 3 Reasons To Buy This Low-Cost Airline