JetBlue And The Embraer E-Jet

| About: JetBlue Airways (JBLU)
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JetBlue was the launch customer for the E-190.

In 2014 the airline deferred 24 on order.

The airline's fleet continues to evolve, but at the top end.

JetBlue (NASDAQ:JBLU) was the launch customer for the Embraer (NYSE: ERJ) E-190. It was an order that provided Embraer with a welcome boost to its E-Jet program. That program has gone on to great success. As of year end 2016, 707 of the E-190 and E-195 had been delivered.

The E-Jet program has been such a success that Embraer is currently in flight test with its revised E2 versions of these aircraft. The E2 has new engines and new wings. Embraer expects to build on it success with these new models.

Meanwhile at JetBlue fleet planning has been evolving. The deferral of the E-190s in 2013 has not been reviewed. The airline has focused on larger aircraft, especially the Airbus A321.

The following chart illustrates how JetBlue's fleet planning has been evolving. Not only the E-190 fleet, but even the A320 fleet has seen slower growth. The growth has been by adding the larger A321. The A321 provides JetBlue an opportunity to offer its new Mint cabin on transcon flights and drive its ambitions to capture more premium fliers.

On the analyst call yesterday, there was an expression of uncertainty about the fleet planning. Another report notes the rising maintenance costs as the fleet ages. What does the fleet age look like? In the next table we list the active fleet with average age and also published orders.

Although the A320 fleet is the oldest, there is high confidence in this model as we can see from the A320neo orders. Note the A320neo orders represent only ~20% of the current fleet. That is because the fleet is relatively young. Replacement is not as necessary when compared to its peers, who fleets are even older.

The big item to notice is the focus on moving towards the larger A321. If all the orders are delivered, this sub-fleet will more than double. Whereas the A321 accounted for 16.3% of the 2016 fleet, after all the deliveries the A321 will account for 36.4% of the fleet.

The market reaction to the 1Q results appear positive as the stock went up today. If the oil price rise starts to fade (as many expect) all the airlines are going to see improved business conditions. JetBlue, with its relatively modern fleet, will benefit as the newer more fuel efficient aircraft are delivered.

Stephen Priest the airline's CFO noted: "We continued to see the impact of older aircraft, as well as escalation in our maintenance contracts, with unit maintenance costs of 8.7% year-over-year."

He then went to say: "The second part of our fleet review is taking a hard look at the future of the E190 in our fleet. We believe the timing is ideal. Our 30 aircraft on lease begin to expire starting in 2023, and we need to decide on the 24 Embraer aircraft we currently have on order. The delivery dates on these aircraft were deferred in 2014. It is no secret that the E190 is a higher CASM aircraft. We estimate that our E190 CASM is roughly 20% higher than our A320s on a stage length adjusted basis."

Reading through the call transcript it is clear Wall Street analysts quickly picked up on the E-190 issue. If JetBlue defers the E-190 orders to the 2020 timeframe, that means they will not take delivery. If anything, they might consider the E190-E2.

But this deferral also allows JetBlue to review all the options. That would include the Bombardier (OTCQX:BDRBF) C Series. Although the E-Jet has been popular, JetBlue has had some challenges. This small window might offer Bombardier the opportunity it needs to sell their competing aircraft to JetBlue. We understand the airline has had its team visit Mirabel factory.

JetBlue is in a very influential spot now as both Bombardier and Embraer jostle for an order.

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