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The airline industry has been giving varying signals in the last month or so. On the one hand, stocks are rising on the margin optimism as the oil futures have come down to around $90 and a fresh round of increases in fares are expected to improve the top line. Also, IATA has improved the revenue and margins guidance for the airline industry. On the other hand, analysts are cutting their profits forecast for the airline industry on the premise that fuel prices have declined lesser than what was anticipated. Also, traffic growth is expected to be subdued due to the weak economic conditions.

JetBlue has been a classical demonstration of the above mentioned notion. Sterne Agree's analyst cut Q3 profit estimate for JetBlue Airways Corporation (JBLU) from 22 cents to 16 cents because of the fuel price concern. He also cut forecasts for Q4 and the next year in the expectation of moderate growth in passenger revenues.

Only a week after, JBLU reported impressive numbers for September. RPMs rose by 6.1% YoY. Revenue passengers rose by 7.2%.

Below is the table for the press release:

Factors

Sep-12

Sep-11

Change

Revenue passenger miles (000)

2,513,957

2,368,822

6.1%

Available seat miles (000)

3,196,710

2,968,971

7.7%

Load factor

78.60%

79.80%

-1.2%

Revenue passengers

2,160,386

2,014,941

7.2%

Departures

21,052

19,369

8.7%

Average stage length

1,085

1,090

-0.5%

The only negative movement has been the decrease in the load factor. The 1.2% decline shows that the analysts are right after all in saying that a slowdown in passenger growth is expected to come in the near future.

Second Quarter Highlights:

JBLU posted strong results in the second quarter. Revenues rose by 11 percent to $1.23 billion. Earnings doubled to $52 billion, as JBLU announced its best ever results for the second quarter. Margins also improved for the discount airline by 2.7 points to 10.2%. It was the ninth consecutive profitable quarter.

Given that September is normally a cold month for airline revenues, JBLU's performance has been a pleasant surprise for investors. In terms of revenue, Boston is a growth story for the stock. JBLU flies to twice as many non-stop destinations as any other carrier in Boston. Currently, the company has 100 departures a day from Boston and the company is well on its way to increase the departures to 150 by 2015. Also, the company is expanding its operations in the Caribbean, where the company wants to achieve the same market share it has achieved in Boston. Currently, 24% of the company's ASM come from the region, which has increased from 13% in 2008.

The company has also made partnerships with different airlines that have helped it gain access to strategic routes. It has 21 partners. Ancillary revenues have been another growth avenue for the firm. Although this is something that will not suit a budget airline, JBLU has been able to capitalize on some added services. The chart below shows the increasing trend of ancillary revenues (click to enlarge image):

JBLU has managed to keep its CASM down as compared to its peers. Being a low-cost airline, costs are an integral part of JBLU's overall profit structure. The company has the third lowest CASM in the industry, behind Spirit and Southwest Airlines (LUV). In order to keep its costs down and remain competitive in the market, the company plans to include a couple of A320 in its fleet in order to improve margins through increased fuel efficiency.

The company also ended up with a strong liquidity position. Currently, cash is 25% of revenues and this does not include the two revolver facilities of $225 million. More cash in hand is always a plus as it can be used for inorganic growth. In fact, cash has and will help the company achieve its plans in terms of replacing its jets. The cash has also been used to keep its debt down, something that has been a bane for most of the airlines. The company is expecting to produce positive free cash flows for the fourth year in a row.

Conclusion:

JBLU is a story of growing revenues and improving margins. Investors will be delighted to hear that through the last three years, revenues have risen by 45%, profit margin has improved by over 60%, free cash flows have risen by 124%, EPS has improved by 325%, ROE has gone up by 423% and debt to equity has declined by 31%. The stock is down 28% compared to its price three years ago. The stock is trading at a forward multiple of 8x which is its lowest in the last five years. We are recommending that our readers get long JBLU.

Disclaimer: The article has been written by Qineqt's Industrial Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

Source: JetBlue Airways: A Certain Winner In An Uncertain Industry