JetBlue Airways is counting on more than low fares to make its ledgers jet-black. The carrier offers one-class service -- with leather seats, satellite TV from DIRECTV, satellite radio from XM, and movies -- to more than 32 million passengers a year, and taking them to more than 90 cities. It has 925 daily flights in nearly 30 US states, Puerto Rico, Mexico, and 19 countries in the Caribbean and Latin America. Most of its flights arrive or depart from Boston, Los Angeles, New York, Orlando, Fort Lauderdale, and San Juan. JetBlue's fleet of more than 215 aircraft consists mainly of Airbus A320s and A321s, but also includes Embraer 190s.
Our favorable outlook for the business considers: (i) recent uptick seen in the revenue growth outlook; (ii) an increased share repurchase authorization; (iii) solid expense discipline; and (iv) a vibrant culture and brand.
We think the shares are worth $28 or more. This outlook considers a 13x EPS multiple on the 2018 consensus EPS of $2.10. Our price target represents nearly 30% upside. Our target multiple of 13x is within the bands of historical trading ranges and represents a discount to the broader equity market. We believe faster than expected growth in PRASM (passenger revenue per available seat mile) could lead to upside to consensus EPS estimates, offering one of several levers of upside to our $28 price target.
See the supplemental pages of this report for more of the details about JetBlue Airways Corporation that support our investment thesis.
(i) Recent uptick seen in the revenue growth outlook - The company expects December PRASM to be positively impacted by its cobrand credit card agreement. JBLU’s better than expected PRASM outlook comes on the heels of positive reports from several other US airlines, which have mostly indicated an improving yield environment, especially in the domestic market where JBLU does the majority of its business. Given the recent spate of positive updates from several airlines, investors are likely to continue to be drawn to the improving outlook for the airline sector. It is very exciting to be seeing signs of upside to recently sluggish trends in passenger revenue for the overall sector since 2014.
Exhibit: US Airline Industry Passenger Revenue 1997-Present
(ii) Share repurchase authorization increased - JBLU recently announced an increase to its share repurchase authorization, from $250 million to $500 million through 2019. This move signals management’s confidence despite heightened capital expenditure needs (guidance of $1.3 billion of capex over the next few years). Moreover, we highlight that most investors do not yet fully appreciate how the airlines have changed the way they do business with the Street in terms of capital allocation, as ever since 2010 the entire sector has been ramping up the amount of money returned to shareholders.
Exhibit: Aggregate Airline Sector Capital Returned To Shareholders
(iii) Cost discipline better than most - JetBlue plans to extract $250-300 million in structural costs by 2020. Management has guided to capacity growth of high single-digits CAGR through 2020 with CASM Ex-fuel of flat to up 1%, including an assumption for a new pilot contract. Even baking in a bit higher assumptions, JetBlue is expected to hold the line on costs much better than peers.
Exhibit: Revenue & Cost Outlook Peer Group Analysis
(iv) Culture not an issue – Let’s face it. Most of us who travel all have that one airline we just can’t stand. My family will take the bus over US Scare-ways (aka US Airways). The good news is JetBlue is much less often distinguished as a bad brand in the space. Ask around. We believe the company’s “culture” is a strength that encourages outstanding service and fosters a family-like environment. JetBlue is a growth company that we believe strives to become a global carrier. Commercial opportunities drive decisions. Costs are considered but customer experience is equally valued. So important.
Exhibit: Brand Resonates Well With People
JetBlue flies to more than 90 cities with 925 daily flights to 87 cities in 19 countries throughout the Americas, with one-third of its route network in the Caribbean and Latin America. It concentrates primarily on the cities of Boston; New York; Long Beach, California; Fort Lauderdale and Orlando, Florida; and San Juan, Puerto Rico. The US represents nearly 70% of total sales, while Latin America and the Caribbean account for 30%.
The New York-based carrier is the largest domestic airline at New York's JFK International Airport -- the US's biggest travel market. Operating primarily out of Terminal 5, or T5, JetBlue also serves New Jersey's Newark Liberty International Airport, New York's LaGuardia Airport, Newburgh, New York's Stewart International Airport, and White Plains, New York's Westchester County Airport. The company operates a fleet consisting of 25 Airbus A321 aircraft, 130 Airbus A320 aircraft and 60 Embraer 190 aircraft. Its in-flight entertainment system includes 36 channels of free DIRECTV, 100 channels of free SiriusXM satellite radio and premium movie channel offerings from JetBlue Features, a source of first run films.
JetBlue has experienced unprecedented revenue growth over the years. In 2015 its revenues jumped by 10% to peak at a record-setting $6.4 billion. Its profits also surged by 69% to reach $677 million, another company milestone, primarily due to a major decrease in fuel prices. The growth for 2015 was due to higher passenger revenues mainly attributable to increased capacity and yield. Ancillary revenue continues to be a source of significant revenue growth, primarily driven by customer demand for JetBlue's Even More Space products as well as changes to its fee structure.
Traditionally focused on the leisure traveler, JetBlue has been developing more service for the business customer to offset the seasonal limitations of the vacation market. Also to develop more business beyond vacation travelers, JetBlue has been growing its operations in Latin America and the Caribbean (LACA), which has a strong presence of visiting-friends-and-relatives (VFR) travelers in addition to vacationers. LACA now accounts for about 30% of JetBlue's revenues.
In many ways JetBlue has taken a lesson from -- and set its sights on -- Southwest Airlines, the guru of the low-fare airline world. Like Southwest, JetBlue works to keep costs down, eliminating amenities such as airport lounges and full meal service. It also relies on electronic ticketing and a non-unionized staff. JetBlue departs from the Southwest model, however, by assigning seats and by operating more than one type of aircraft. The company also prefers to expand its operations organically -- through its operations and partnerships, rather than through acquisitions. In 2016 JetBlue added a new destination to its expanding Latin America and Caribbean network, at Quito, Ecuador's Mariscal Sucre International Airport (to serve a once daily service from Fort Lauderdale-Hollywood International Airport).
In 2014 JetBlue deferred 13 Airbus A321 aircraft orders and eight Airbus A320 aircraft orders from 2016-2020 to 2020-2023. Of these deferrals, ten A321 aircraft orders were converted to Airbus A321 new engine option (A321neo) orders and five Airbus A320neo aircraft orders were converted to Airbus A321neo aircraft orders. It also converted three Airbus A320 aircraft orders in 2016 to Airbus A321 aircraft orders. At the end of 2014, the company had 127 aircraft on order, which are scheduled for delivery through 2023.
That year the company took delivery of nine Airbus A321 aircraft, all equipped with it Mint layout (16 fully lie-flat seats, four of which are in suites with a privacy door, a first in the US domestic market). The company expanded its portfolio of commercial airline partnerships throughout the year and a code-sharing agreement with current partner El Al Airlines. In 2014 South African Airways also joined the TrueBlue loyalty program. During 2014 it entered into eight new interline agreements and had 38 airline commercial partnerships at the end of 2014.
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