JetBlue's (NASDAQ:JBLU) third-quarter results failed to match estimates. The miss, however, isn't a very big deal in this case as JetBlue reported a significant year over year rise in its financials. But, there are a few concerns that investors need to watch. As its fleet has aged, unit costs have grown. With the aging of aircrafts, labor and maintenance costs increase. Thus, JetBlue hasn't been able to efficiently balance its low fare pricing with productivity.
Another reason to blame for JetBlue's weak performance is the investment that it has made in the already saturated Caribbean market. JetBlue should instead employ its aircrafts into either international or domestic markets, where there is more scope of generating revenue rather than the Caribbean/Latin American markets.
A customer-focused approach will improve financial performance
Ancillary revenues account for a major part of JetBlue's profit. The good thing is that JetBlue always thinks from the point of view of a customer, and tries its best to provide best in class services. It provides extra legroom for extra comfort. It is even looking to generate more revenue by adding more seats to some of its planes without compromising on legroom. The new slim-line seats allow airlines to put rows closer together, and thus, JetBlue could add two rows of seats to its A320 planes while only reducing seat pitch from 34 inches to 32 inches, which would still be the highest legroom in the airline industry.
JetBlue is also shifting to bigger planes. JetBlue is in favor of having more A321s with 190 seats in its fleet, along with a sub-fleet of 11 A321s with 159 seats primarily for 'Mint' premium cabin service, which is offered on flights across New York and Los Angeles. This arrangement should lower JetBlue's unit costs considerably. Also, speaking of amenities, JetBlue's revenue from its 'Even More' program, which accounts for 25% of the company's revenue, is expected to hit $190 million in 2014.
In addition, JetBlue is keen on providing more services in order to increase the customer base. The ongoing 'Flying it forward' scheme is an interesting one by JetBlue that began from New York. Here, people are asked to describe where they want to go and why, to be the lucky fliers. The company also offers various others services to customers that include JetBlue Getaways, where it provides exclusive savings and facilities for vacation based tickets.
JetBlue also provides Fly-Fi, a real broadband internet in the sky. It delivers a robust online experience, much like anyone would expect at home or work. JetBlue is installing this service on almost all of its aircrafts which will offer Wi-Fi accessibility to fliers for the duration of their flight. JetBlue's noticeable efforts yield a Fly-Fi plus plan for high bandwidth applications (like streaming movies) as well. The company still operates in its beta phase which leaves it with a whole lot of opportunities and scope for constantly upgrading its services.
Some more catalysts
Also, JetBlue's margins have decent room to grow on the back of lower fuel prices, and also due to the outcome of the company's fuel hedging program. Moreover, JetBlue has expanded its flights focused on Boston city, so as to increase revenue from business classes. It has added 7 new routes in Boston and Fort Lauderdale (NYSE:FL).
JetBlue has linked Boston to three international destinations, namely to Liberia (LIR) in Costa Rica, Puerto Plata (POP) in the Dominican Republic, as well as St. Lucia (UVF) in the Caribbean. More importantly, JetBlue has also asked the U.S. Department of Transportation for the flight rights to service two routes to Mexico City. JetBlue wants to fly its 150-seat airbus A320 aircrafts to Mexico City from Fort Lauderdale and Orlando by mid 2015. These moves should help it gain business from corporate travel contacts that look for low-fare premium services.
Risks and fundamentals
However, investors need to keep an eye on JetBlue's fundamentals and debt, which do not paint a very good picture. It has total debt of $2.36 billion, as compared to cash of only $742 million. In addition, a current ratio of 0.63 signifies weakness in short-term liquidity. Hence, the company will have to bear high interest expenses that will weigh on its bottom line.
Also, JetBlue has a high short float of 22.8%. This means that a number of investors are betting against the stock. However, the good thing is that the short float is declining, as it dropped to 48.30 million last month from 50.22 million in the prior month. Moreover, JetBlue's valuation indicates a slight improvement in earnings. It has a trailing P/E ratio of 13.93 while the forward P/E ratio is 13.35. If the company is successfully able to reduce costs, then it can deliver earnings growth despite the challenges and also improve cash flow.
JetBlue's focus on delivering cutting-edge services to customers and gain more business by flying lucrative routes will help the company improve its financial performance. In addition, it is also hunting for ways to reduce costs. As a result of such strategies, it is quite likely that JetBlue can continue appreciating even after a strong run up of 53% this year.
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