JetBlue Airways: Positioned to Soar Once Industry Conditions Improve

by: Mark Krieger May 25, 2008 | about stocks: JBLU    

Mark Krieger

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This past week was disastrous for the airline group; the week’s 4% rise in crude was the catalyst sending many shareholders into a panic mode as they sold at will, driving the price of the group into the ground. The fact that pure havoc was resonated through the entire sector is an understatement, as United (UAUA) lost 50% of its value, American (AMR) got slammed with a 33% drop and Delta (DAL) took a 25% hit. JetBlue (JBLU) had stronger relative strength, losing only 15% of its value, although it too, closed at an all time low of $4.25.

The airlines are responding to the fuel crises by doing all the right things such as utilizing fuel hedging programs, initiating capacity reductions and reducing overall costs, however, Wall Street so far, seems unimpressed. The market more than overreacted, as it often does, providing some real bargains for those contrarians with the sense to step up to the plate and buy at these giveaway prices. The fuel debacle has priced airlines at 30 year lows, giving “bargain hunters” the opportunity to really load up.

JBLU is a “no frills” airline with a newer fleet of 134 aircraft . It has a business model similar to that of the highly profitable Southwest Airlines (LUV). It offers its passengers discount tickets on 550 daily flights, with perks such as leather seating, entertainment systems and internet/phone services.

JBLU has been on a roll lately, despite difficult industry conditions. They just reported 1st quarter results that soundly beat expectations. The company posted revenues of $816 million, a notable 34% increase from 1st quarter 07 revenues of $608 million. JBLU ended the quarter with a $8 million loss versus a $22 million loss in 2007.

Its balance sheet is impressive with $1 billion in cash and only $3 billion of total debt, so they have the liquidity to weather the current storm. The shares appear to represent compelling value at these severely oversold levels and are currently trading at a 30% discount to its book value of $6 .

Potential short squeeze present: There are 42 million shares sold short out of 224 million outstanding, representing a staggering 19%, almost double Amazon’s well publicized short position of 10%. The short ratio computes to a 7, meaning, it would take seven days of average daily volume just to purchase back all the shorted shares, that’s a significant number and creates the prospective of a massive short squeeze if the shorts ever get pressed into a covering mode.

The giant German Air Carrier Duetsche Lufthasnsa apparently smells value as they took a 19% stake in the company last January by purchasing $300 million worth of shares at $7.27 each. They are now JBLU’s single largest shareholder, with Fidelity Magellan holding the second spot with a 15% position. The analysts are also jumping on the bandwagon, as both JP Morgan and Bear Sterns have each issued recent broker upgrades.

Let’s face it: with crude at $135 a barrel, JBLU is facing a major hurdle. Its fuel costs alone, for the quarter just reported, were 38% of total sales. Wall Street is pricing the airline industry at this juncture as if the oil bubble will never pop. It will eventually pop and when it does, the shares will rise as quickly as they dropped.

JBLU’s recent significant progress was not enough to overcome the forces of this past week’s meltdown of the entire sector, however JBLU is well positioned to soar once industry conditions start to improve.

Disclosure: Long position in JBLU

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This article has 14 comments:

  •  
    May 25 01:44 PM
    Jetblue is the new Southwest with different improvements. I believe Soros is the man and with Luftunza and Fidelity Magelllion buying in this is a investment not a set up like the bank ceo's in 2007 selling their C.M.O. around the world. I.M.H.O.
    Reply | Link to Comment
  •  
    May 25 01:44 PM
    Jetblue is the new Southwest with different improvements. I believe Soros is the man and with Luftunza and Fidelity Magelllion buying in this is a investment not a set up like the bank ceo's in 2007 selling their C.M.O. around the world. I.M.H.O.
    Reply | Link to Comment
  •  
    May 25 01:44 PM
    Jetblue is the new Southwest with different improvements. I believe Soros is the man and with Luftunza and Fidelity Magelllion buying in this is a investment not a set up like the bank ceo's in 2007 selling their C.M.O. around the world. I.M.H.O.
    Reply | Link to Comment
  •  
    May 25 01:44 PM
    Jetblue is the new Southwest with different improvements. I believe Soros is the man and with Luftunza and Fidelity Magelllion buying in this is a investment not a set up like the bank ceo's in 2007 selling their C.M.O. around the world. I.M.H.O.
    Reply | Link to Comment
  •  
    May 25 01:44 PM
    Jetblue is the new Southwest with different improvements. I believe Soros is the man and with Luftunza and Fidelity Magelllion buying in this is a investment not a set up like the bank ceo's in 2007 selling their C.M.O. around the world. I.M.H.O.
    Reply | Link to Comment
  •  
    May 25 02:30 PM
    Every time you hit publish it enters your comment.
    Maybe you are REALLY enthused about JBLU.
    Reply | Link to Comment
  •  
    May 25 03:03 PM
    HOLDING FAST TO BIG BLUE
    Reply | Link to Comment
  •  
    May 26 01:01 AM
    The article made a lot of good points but only superficially delved into the point that with all of the struggles that do face the industry... oil is a problem for Jetblue as well. Those that are best positioned (Jetblue) will benefit with the seat and flight reductions which are sure to take place and a consolidation and retracting market. The worse the news gets for the industry, the better the result for those positioned defensively (low cost carriers)
    Reply | Link to Comment
  •  
    May 26 01:42 AM
    The oil price will never come down, Unless if they can raise the price of the plane tickets, or they will loss forever.
    Reply | Link to Comment
  •  
    May 26 01:42 AM
    The oil price will never come down, Unless if they can raise the price of the plane tickets, or they will loss forever.
    Reply | Link to Comment
  •  
    May 26 06:11 PM
    The word "only" should NOT be used in front of the phrase "3 billion dollars of total debt", especially for a company currently losing money with a market cap of less than a billion. Face reality. Only LUV can use the word "only" when it comes to debt for the airline sector.

    Reply | Link to Comment
  •  
    May 27 09:54 AM
    JBLU is not a "no-frills" airline, and it's difficult to understand why people keep using that term. Southwest is "no-frills". JBLU has seat-back TVs with 40 live channels, a loyalty program that actually lets you use your rewards and staff that actually seem to care. The primary problem in the industry is that it's made an airline seat a commodity as opposed to creating differentiation. As long as JBLU can command a $20 premium per seat for travelers who appreciate the difference, they will survive.
    Reply | Link to Comment
  •  
    May 27 08:19 PM
    He is right. Now is the time to buy this stock. Management knows how to cut costs and that will bode well for jblu when earning come out. And people are still flying, it's much cheaper than traveling by car now.
    Reply | Link to Comment
  •  
    May 29 02:11 PM
    Playthegame is right, what in gods name would you consider frills?

    I flew from Chicago to JFK on Delta and got a small RJ with NO leg room, one bag of mix, hateful people. 700 dollars one way.
    I flew back on jetblue with 50 channels live TV, LOTS of room, leather, unlimited snacks, great people and 120 dollars.
    I'll take the live TV over a domestic major first class any day of the week.
    Reply | Link to Comment
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