JetBlue (NASDAQ:JBLU) has been able to consistently grow its revenues by increasing its service to other cities and countries. They have introduced aircraft with an increased number of seats, and expanded the number of flights available on a seasonal basis. With JetBlue's service to Bermuda expected to kick off in May 2017, JetBlue has become the fastest growing U.S. Airline in Bermuda with more non-stop flights and expanded service. Based on this, this would increase market share, deliver growth and boost share price.
JetBlue's revenue growth has been impressive: 4.5B in 2011, 4.98B in 2012, $5.44B in 2013, $5.81B in 2014 and $6.41B in 2015.
The company posted a strong third quarter earnings. The company said that the primary reason of lower expense and higher operating net income is mainly due to the lower fuel prices. The company generated $1.3 billion in cash from operations for the nine-month period ending September 30, 2016. The operating expense per available seat mile decreased by 3.1%. The operating income increased by $3 million over the comparable period in 2015.
The company is expected to generate additional revenue by boosting its service to Bermuda. According to the company's press release, starting May 18, 2017, JetBlue will operate daily year-round flights between New York's John F. Kennedy International Airport (JFK) and Bermuda's L.F. Wade International Airport (BDA), with an evening departure from New York and a morning departure from Bermuda.
New York to Bermuda Round Trip
= 150-seat Airbus A320 aircraft x $450 round trip x 30 days x 12 months
= about $25 million (year-round daily schedule between New York and Bermuda)
= about $25 million (second daily seasonal summer between New York and Bermuda)
= $50 million total revenue per year
Boston to Bermuda Round Trip
= 150-seat Airbus A320 aircraft x $400 round trip x 30 days x 12 months
= about $22 million (year-round daily schedule between New York and Bermuda)
= $22 million total revenue per year
The flight fare used in my calculation was the current fair as quoted on JetBlue's website. For the purpose of this calculation, I ignored the lower and higher price instead I took the medium price. From the vacation packages, the company could generate another 50% of revenue. These new services (flights between New York and Bermuda and flight between Boston and Bermuda, based on the rough estimate, the company can potentially generate about $120 million in operating revenue per year.
The airline is also offering the airline's award-winning service featuring complimentary and unlimited name-brand snacks and soft drinks; free Hollywood movies; and the most legroom in coach, according to the report.
Fuel Cost/Crude Oil Forecast/Net Profit
Generally, aircraft fuel is one of largest expenses for the airlines. This is not something airlines can work on to reduce it like it can in other areas such as salaries, aircraft rent etc.... In terms of aircraft fuel price and volatility, the company said in its earnings report as follows:
Its price and availability has been extremely volatile due to global economic and geopolitical factors which we can neither control nor accurately predict. We use a third party to assist with fuel management service and to procure most of our fuel.
From the below chart, we can see the following:
- In 2013, fuel expenses accounted for 38% of the total expenses ($3.14 per gallon)
- In 2014, fuel expenses accounted for 36% of the total expenses ($2.99 per gallon)
- In 2015, fuel expenses accounted for 26% of the total expenses ($1.93 per gallon) In 2016 (9 months), fuel expenses accounted for 20% of the total expenses ($1.37 per gallon)
Source: Created by Author (data obtained from SEC filings)
In 2015 and 2016, the company benefited from the lower fuel costs; the fuel cost accounted for 20-26% versus 36-38% in 2013 and 2014. The big question is, will the company enjoy lower fuel costs in 2017? According to IATA's (International Air Transport Association) forecast, for 2017, the net profit for the airline industry is expected to decrease to $29.8 billion from $35.6 billion in 2016. As we can see from the chart below, there is a direct relationship between the fuel cost and airline industry's net profit.
- In 2014, crude oil traded at $100, which translates to $13.7 billion in net profit for the airline industry.
- In 2015, crude oil traded at $54, which translates to $35.3 billion in net profit for the airline industry.
- In 2016, crude oil traded at $45, which translates to $35.6 billion in net profit for the airline industry (estimate).
- In 2017, crude oil is expected to trade at $55, which translates to $29.8 billion in net profit for the airline industry (forecast).
You might be wondering how come 2015 and 2016's crude price and airline industry's net profit do not correlate. The number used for 2016 is an estimate from the IATA. We don't have an actual number for 2016 yet.
The company said in its third quarter earnings that the fuel expense for 2017 is expected to increase by $120 million, which translates to a 10-12% increase in fuel expenses compared to the previous year.
= $1.1 billion approximate (fuel expense in 2016)
= $1.2 x 11%
= about a $120 million increase in fuel expense for 2017
Investors should watch out for:
The crude oil price is recovering slowly. The macro environmental factors favor the crude oil price as OPEC agreed to reduce its production. Even at $55 a barrel, the net profit for the airline industry is expected to decline this year.
- For the fourth quarter of 2016, the cost per available seat mile is expected to increase by 4.5-6.5% due to the negative impact of hurricane Matthew.
- For the full year 2016, the cost per available seat mile is expected to increase by 0-1.5%.
The company maintains a healthy cash position. The company had cash, cash equivalents and short-term investments of $1.5 billion as of the third quarter. Even though the company expects to generate additional revenue of about $120 million by boosting its service to Bermuda, the fuel expense is expected to increase by approximately $120 million; this would affect the company's net profit. The $120 million additional revenue is a rough estimate by me; see the above calculations.
I believe this is a conservative number; it is possible that the company may generate more than $120 million in additional revenue. I would look out for the crude price trend because it is one of the largest expenses for the airline; the higher crude oil price would negatively affect the earnings per share. The Wall Street expects to generate $6.6 billion for the full year 2016. Overall, the company is expected to generate higher revenue for the full fiscal year in 2017. I expect the company to post close to $7 billion in operating revenue for the full fiscal year in 2017.
Based on my analysis, I recommend JetBlue as a BUY.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.