H.J. Huneycutt

Jet Blue: Value Buy and Oil Hedge

Mr. Herbst,

Thanks for your thoughts.

Not sure where you are getting the 9.87 cents figure. The 10-K states "5.94 cents" excluding fuel costs on page 2 (or page 9 of the PDF document I linked to --- idc.api.edgar-online.c...). Not sure that I personally find this figure terribly relevant --- I just threw it in for the article. But it's directly from the 10-K --- maybe you're looking at it with fuel costs (I should have noted that my figure was excluding them).

As far as debt-to-assets, I'm not sure where you are getting your figures. Perhaps if you are including Goodwill and Intangibles in your calculations, then that is true, but it's certainly not true when you look at Net Tangible Assets. Delta's massive Goodwill account is not a real asset that can be used to cover debt in the event of default.

Good point on revenues-to-debt, though. Hadn't thought about looking at it from that perspective as I mostly analyze debt from a liquidation standpoint.

On Jun 05 01:10 AM Robert Herbst wrote:

> Mr. Huneycutt,
>
> Respectfully I dispute some of your conclusions from the article
> above:
>
> "LT Debt"-- Y/E 2008 was ~$2.9 billion as reported in the SEC 10K
> filing. As a ratio to operating revenue this is not only the highest
> in the industry (largest 10 airlines) but using this ratio, is nearly
> twice what any other airline carries. As a percentage of assets,
> JBLU's LT Debt is at or above the rest of the industry.
>
> "Unrestricted cash" = $571 million. As a ratio to operating revenue,
> this is about average for the industry and was -propped up- by the
> infusion of $300 million from Lufthansa which, IMO, was their headway
> into "Open Skies II".
>
> "CASM" (unit costs) -- Your article states it as 5.94 cents. It is
> actually 9.87 cents. (source: SEC 10K)
>
> "Industry losses over history" -- While it's true "Net" profits are
> minimal. Since 1950 and a decade before the first commercial jets,
> there have been only 2 -relatively- short-term time periods of industry
> losses;
> - 1990-1993 had a net loss of $12.8 billion.
> - 2001-2005 had a net loss of $35.1 billion.
> - In the last 59 years, 41 had net profits.
> - In the last 59 years, 49 had positive operating income.
>
> We (apparently) agree fares need to go up in order to make this very
> valuable industry stable and as safe as it needs to be.
>
> Robert Herbst
> AirlineFinancials.com
> (disclosure: Myself and my family hold no equity position in JBLU
> at this time)

Jet Blue: Value Buy and Oil Hedge

Frogmatic,

I think the market consistently overreacts to secondary offerings. Nobody likes dilution, but here's the deal --- when I analyze a company like JBLU, I assume more dilution is coming. It does not mean the company is 'in trouble.' It does mean they would like to have more cash. JBLU would appear to have one of the larger cash cushions in the industry, but this move still might make some sense for them given their historical CapEx. But management has already expressed an intention to slowly cut their CapEx down by 2010.

I'm actually more skeptical of companies that do equity offerings when their stock is peaking --- because why would you need to do an offering if the market perceives that you're in terrific shape? That's news! At $4 - $5 per share, I think this sorta issue is already factored in with JBLU --- at least, all my figures were based on the premise that this was possible --- which is why I used a rather high cost of capital for them and assumed further dilution when calculating totals.

Jet Blue: Value Buy and Oil Hedge

User,

Stop losses are a terrible strategy if you ask me. It's a sure fire way to screw yourself and it's a rather nonsensical protection scheme.

Why would you buy a stock if you believed it was overvalued? And if you thought it was a good buy at $15, why would you suddenly think it's a good sell at $10? It would make sense to me that it would be a better buy at $10 --- but the logic behind a stop loss suggests that's not the case.

I will never use stop losses. It's a good way to destroy one's returns and offers no real protection. Hedging is much more effective if you play your cards right.

Jet Blue: Value Buy and Oil Hedge

Astro,

You can spin it as 'not a bailout', but I don't think most individuals would agree. Certainly, the media took it as a "bailout":

archives.cnn.com/2001/.../
www.businessweek.com/m...
www.nytimes.com/2001/0...

That CNN article is pretty good because it cuts to the heart of what I've been saying --- Ari Flescher said at the time of the bailout --- and I quote:

"A safe, viable and effective commercial air travel system is important to America's economy and to our way of life."


Yes, that's right --- air travel is essential to "our way of life". To me, that's total BS! We could do fairly well for ourselves with high-speed rail, more Cisco telepresence systems, and minimal air travel. I don't say that because I don't like air travel --- obviously, if I have to go from NYC to LA, I'd much rather fly. But I question whether flight on the scale we've utilized it is even remotely sustainable. Fares are going to be much higher in the future and flight will be limited to those that are better-off --- that's my belief.

The government has done everything possible to prop up this industry at unsustainable levels. I'd rather see some of these legacy carriers go BK, end subsidies for small markets, and expand our high-speed rail infrastructure. It's more economically viable in the long-run.

Jet Blue: Value Buy and Oil Hedge

Frogmatic,

I have never heard of management for any company doing an offering solely because they thought the stock price was overvalued. Check through JBLU's history --- they've done this before. In fact, one of the reasons I didn't put much stock into the "INCR in SE" figure is precisely that reason --- it gets distorted by offerings.

Hey, I'm not going to sit here and argue that the airline sector is the prettiest one out there. I'm telling you right now, airlines have historically failed. I feel dirty even suggesting an airline as a potential buy. But based on asset values and current levels of profitability for JBLU, I believe they are undervalued. They are one of only two major US air carriers that I believe has any real value moving forward.

General rule of thumb --- buy on bad news when everyone is panicing. JBLU under $4.50 looks undervalued to me --- I wouldn't bet the farm on it or anything, but it's a good hedge if you have some bullish oil picks like me (now that oil has skyrocketed).

Jet Blue: Value Buy and Oil Hedge

Ha! Looks like I timed this article perfectly --- somehow. JBLU is plunging after-market. I like it much better in the $4 - $4.50 range than I do the $5 range.

If it dips below $4, I think it becomes particularly more attractive.

Jet Blue: Value Buy and Oil Hedge

User,

Nice little rant, but I'm not completely sure how you are disagreeing with me. In your rant, you admit that the French and German governments are propping up Airbus. You also imply at the end of your argument that the airlines are heavily subsidized by suggesting that ticket prices would 'have to rise dramatically' for a 'healthy airline sector.'

I'm also not sure how you ignore the fact that the major airlines (here in the US) were bailed out in 2001 and may need to be bailed out again. And the bailouts would probably have been more frequent if not for the regulation era pre-1978.

The US government still subsidizes air fares in certain markets, as well:
query.nytimes.com/gst/...

All in all, there has been a consistent pattern of government intervention in favor of the airlines and air travel throughout the past half-century. I would not complain one bit if the industry were required to survive fully on its own --- that would mean a significant increase in fare prices and a much greater interest in high-speed rail, which would be beneficial to Americans in the long-run.