JetBlue Airways Corporation (JBLU) reported an encouraging 14.3% year-over-year increase in traffic for the month of December. Airline traffic is measured in revenue passenger miles, which implies one mile flown by one passenger.
On a year-over-year basis, capacity (or available seat miles) grew 17.1% and load factor (percentage of seats filled with passengers) contracted 190 basis points (bps) year over year to 80.2%.
JetBlue also outpaced its major competitors Delta Air Lines (DAL) and United Continental Holdings Inc. (UAL) with respect to traffic in December 2011. Delta and United Continental reported a decline of 2.3% and 0.7%, respectively, in traffic in December 2011, owing to lower capacity levels. However, the low-cost carrier Southwest Airlines Co. (LUV) registered a nominal year-over-year growth of 0.4% in its December traffic.
Despite the volatility in fuel prices, fiscal 2011 ended on a positive note for the low-cost airlines compared to industry movers like Delta and United Continental, mainly due to their low-cost structure.
At a juncture where major air carriers are struggling with surging operating costs, domestic airlines like JetBlue have shown greater efficiency in managing its cost structure.
JetBlue has taken several initiatives to maximize the cost efficiency of its fleet and reduce aircraft purchase obligations by nearly $800 million through 2016.
The company has reduced its aircraft purchase obligations (it will deploy 25 fewer E190 aircraft). This will help it save approximately $200 million in 2013 and 2014 and also help it generate positive cash flows in both these years. Second, JetBlue will push out the deployment of most of the Airbus A320 and A321 aircraft to 2013. Third, it will purchase 40 Airbus A320neo by 2017 in order to cut down on fuel consumption.
Finally, JetBlue will defer the delivery of 8 airbuses from 2014 and 2015 to 2017, convert 30 A320 delivery positions to A321s, and purchase 40 fuel-efficient A320neos beginning 2018 that will be allocated within its capital expenditure over a long-term period. Given these changes and an average fleet age of only 5.9 years, we believe that JetBlue remains one of the youngest carriers to possess the most fuel efficient fleet among its peers.
The company is also expanding its network footprint in two major growth regions, Boston in New York and the Caribbean in Latin America. JetBlue has consolidated its position as the largest airline serving Boston Logan International Airport by connecting approximately 42 destinations. Given more demand in these regions, JetBlue plans to add flights to existing and new routes, thus enhancing JetBlue’s network.
We also believe that the slowing economy has come as a blessing in disguise for JetBlue. Lower spending levels and price conscious consumers are increasingly attracted toward cheaper flying, which makes it easy for the low-cost carrier to fill seats. Further, enhanced products and services like Even More Space and Even More Speed offerings have helped drive sales.
However, there are several factors that still restrict the carrier’s growth. Fuel price continues to be an overhang for the company. The cost of fuel, which has been at historically high levels over the last few years, is largely unpredictable.
The company’s ability to pass on the increased costs of fuel to customers is limited by the competitive nature of the airline industry. Thus, even a small fluctuation in fuel prices can significantly affect profitability. Fuel prices in the airline industry, estimated at $176 billion will weigh on profits for fiscal 2011. Fuel is expected to account for 30% of the industry costs compared with 13% a decade ago.
Further, industry fuel cost is expected to increase another 2% next year, taking fuel expenses up to $201 billion. A lower profit margin, heavy capital requirements and competitive pricing also remain significant challenges for the carrier.
Hence, we are currently maintaining our long-term Neutral recommendation on JetBlue supported by the Zacks #3 Rank (Hold).
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