March 16, 2015 JetBlue Airways Corporation Current Recommendation Prior Recommendation Neutral Date of Last Change 03/16/2015 Current Price (03/13/15) $18.12 Target Price $22.00 OUTPERFORM SUMMARY (JBLU-NASDAQ) JetBlue Airways fourth-quarter 2014 earnings of $0.26 per share beat the Zacks Consensus Estimate by $0.03. Moreover, earnings were up approximately 86% from the year-ago figure. Results were aided by low fuel costs. This is because fuel costs account for a major chunk of JetBlue s, or for that matter, any airline company s operating expenses. The persistent drop in oil prices has thus significantly boosted the bottom line. Moreover, earnings estimates for 2015 as well as 2016 are on the upswing. Expecting oil prices to remain weak further down the line, the carrier projects fuel costs at $1.97 per gallon (inclusive of fuel hedges and fuel taxes) for the first quarter. We are also encouraged by JetBlue s constant efforts to expand. The company s cost control measures should also boost the bottom line going forward. SUMMARY DATA 52-Week High $18.12 52-Week Low $7.63 One-Year Return (%) 108.78 Beta 0.78 Average Daily Volume (sh) 6,803,344 Shares Outstanding (mil) 311 Market Capitalization ($mil) $5,635 Short Interest Ratio (days) 5.83 Institutional Ownership (%) 96 Insider Ownership (%) 2 Risk Level * Above Avg., Type of Stock Large-Blend Industry Trans-Airline Zacks Industry Rank * 21 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 12.1 Earnings Per Share (%) 26.7 Dividend (%) N/A using TTM EPS 25.9 using 2015 Estimate 11.0 using 2016 Estimate 10.2 2013 1,299 A 1,335 A 1,442 A 1,365 A 5,441 A 2014 1,349 A 1,493 A 1,529 A 1,446 A 5,817 A 2015 1,491 E 1,570 E 1,629 E 1,554 E 6,287 E 2016 6,916 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.05 A $0.11 A $0.21 A $0.14 A $0.52 A 2014 $0.01 A $0.19 A $0.24 A $0.26 A $0.70 A 2015 $0.35 E $0.43 E $0.50 E $0.37 E $1.65 E 2016 $1.77 E Zacks Rank *: Short Term 1 3 months outlook 1 - Strong Buy Projected EPS Growth - Next 5 Years % * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606 N/A
OVERVIEW JetBlue Airways Corporation (JBLU), incorporated in Delaware in Aug 1998, is a passenger airline that focuses on providing high-quality customer service. The low-fare, low-cost carrier operates primarily on point-to-point routes. It transports more than 32 million customers annually to 87 cities in the U.S., Caribbean and Latin America with an average of 850 daily flights. The carrier s fleet comprised 13 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 EMBRAER 190 aircrafts at the end of 2014. The Long Island City, New York based company reported operating revenues of $5.8 billion in 2014, up 6.9%. Passenger revenues accounted for bulk of the total revenues. REASONS TO BUY JetBlue Airways performed encouragingly in the fourth quarter of 2014 reporting higher-thanexpected earnings. Quarterly earnings were 86% above the year-ago figure. Lower fuel costs boosted the bottom line. Average fuel cost during the reported quarter declined 12.9% to $2.70 per gallon. Moreover, important traffic metrics such as revenue passenger miles, capacity and load factor (% of seats filled by passengers) grew 8.5%, 7% and 1.2% respectively. The favorable earnings report impacted the stock positively. Moreover, earnings estimates for 2015 as well as 2016 are on the upswing. Expecting oil prices to remain weak, the carrier projects fuel costs at $1.97 per gallon (inclusive of fuel hedges and fuel taxes) for the first quarter of 2015. JetBlue Airways is constantly making efforts to expand its operations. In keeping with its expansion motive, the carrier announced in Feb 2015 that it will introduce nonstop flights (twice a day) from Baltimore to Fort Lauderdale, FL. The low-cost carrier intends to launch the new service from November this year. In Feb 2015, the carrier also announced nonstop flights (twice a week) between New York's John F. Kennedy International Airport and Grenada's Maurice Bishop International Airport from Jun 11, 2015. Through this move, JetBlue aims to enhance customer satisfaction and attract more fliers, thus boosting its top line. Further, the company s effort to roll out its merchandize platform is well on track. JetBlue has also decided to charge bag fees and squeeze seats in a bid to boost revenues. Late last year, the company announced that it will add bag fees to augment its revenue stream. The carrier declared that it plans to introduce three ticket classes in the first half of 2015. JetBlue customers with the lowest-priced seats will have to shell out fees for all checked luggage. Passengers buying the second category tickets will be able to enjoy at least one piece of checked bag free of cost. While releasing its fourth quarter results, the carrier said it expects capacity to increase between 9% and 10% in the first quarter of 2015 and between 7% and 9% for the full year. JetBlue announced late in 2014 that it intends to increase the capacity of its Airbus A320 planes by 15 seats to 165. The modifications, which will commence in the third quarter of 2016, will take approximately two years to be completed. As a result of the decision to introduce extra seats, JetBlue projects its operating income to increase by $100 million annually. Annual operating income of the carrier should rise by $150 million as a result of its other initiatives. JetBlue stated further that 18 Airbus jets will now be delivered between 2022 and 2023. The jets were earlier scheduled to be delivered between 2016 and 2018. Consequently, capital spending at JetBlue will be reduced by more than $900 million through 2017. Equity Research JBLU Page 2
JetBlue is focused on developing partnerships (codeshare, interline, and baggage handling agreements) with both legacy and international carriers to enhance its services and take advantage of travel benefits. The company has collaborated with several international companies including Cathay Pacific, Air China, the LOT Polish Airlines, Turkish Airlines, Japan Airlines, Silver Airways, Hawaiian Airlines, Aer Lingus, Royal Air Maroc and Korean Air. JetBlue has also struck a one-way codeshare agreement with Qatar Airways and Etihad Airways. We believe such alliances attract travelers by combining efficient services, providing wider networks as well as shorter and convenient travel timings. RISKS The global airline industry continues to face challenges from the soft economic recovery, offsetting the positive impacts of increasing air travel demand within the domestic market. On the other hand, the domestic airline industry faces the risks of high fixed expenses and stiff price competition. JetBlue competes with other players with respect to routes, services, fares, flight schedules, types of aircraft, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs. Increase in maintenance costs remains a major headwind for the company and a large part of this increase is due to the higher cost associated with the use of older E190 fleet and CF34 engines. JetBlue has approved a 20% pay hike for the next three years to maintain its competitiveness with respect to pilot pay packages. The increase in pilot compensation is expected to affect the company s cost going forward. Additionally, higher depreciation due to higher IT infrastructure spending and higher landing fees could drag margins down. RECENT NEWS JetBlue to Connect Baltimore with Fort Lauderdale Feb 26, 2015 In its latest move for expansion, JetBlue Airways announced that it will introduce nonstop flights (twice a day) from Baltimore to Fort Lauderdale, FL. The low-cost carrier intends to launch the new service from November this year. The new connection to Fort Lauderdale-Hollywood International Airport is welcome news for people residing in Maryland and Washington, in particular. They will now have the option to fly nonstop to South Florida a popular holiday destination. Moreover, the new service will help fliers connect to the carrier s diverse network across the Caribbean, Central and South America. Through this move, JetBlue aims to enhance customer satisfaction and attract more fliers, thus boosting its top line. The expansion of its service from Baltimore puts JetBlue in competition with another low-cost carrier Southwest Airlines. We note that JetBlue is constantly looking to expand its network. Recently, the carrier announced nonstop flights (twice a week) between New York's John F. Kennedy International Airport and Grenada's Maurice Bishop International Airport from Jun 11, 2015. Apart from its expansion initiatives, the carrier was also in the news recently when it announced changes to its top brass. Equity Research JBLU Page 3
Earnings Beat at JetBlue in Q4 Jan 29, 2015 JetBlue Airways performed impressively in the fourth quarter of 2014 reporting better-than-expected earnings. The company s fourth quarter adjusted earnings of $0.26 surpassed the Zacks Consensus Estimate by $0.03. Moreover, earnings were up approximately 86% from the year-ago figure. JetBlue s quarterly results benefited from low fuel costs. Operating revenues increased 5.9% year over year to $1.45 billion in the reported quarter and were in line with the Zacks Consensus Estimate. During the quarter, passenger revenues grew 6.9% and other revenues declined 4.1% from the prior-year quarter. Operating Statistics Airline traffic, measured in revenue passenger miles, went up 8.5% year over year to 9.4 billion. Capacity or available seat miles increased 7% from a year ago, while load factor (percentage of seats filled with passengers) improved 120 basis points year over year to 82.1%. Passenger revenue per available seat mile (PRASM) or unit revenue for the reported quarter came in at 11.61 cents, down 0.1%. During the final quarter of 2014, yield per passenger mile fell 1.5% to 14.13 cents. Expenses Average fuel cost during the reported quarter declined 12.9% to $2.70 per gallon. We note that the carrier recorded $26 million as quarterly losses pertaining to settling of fuel hedges. Quarterly interest expense declined 9.3%. Operating expense per available seat mile (CASM) for the reported quarter was down 4.5% to 11.17 cents while excluding fuel and profit sharing, CASM decreased 0.9% from the year-ago quarter. Balance Sheet JetBlue ended the fourth quarter with unrestricted cash and short-term investments of $708 million. Total debt, at the end of 2014, was $2,233 million compared with $2,585 million at the end of 2013. Guidance The company expects CASM for the first quarter of 2015 to decrease in the range of 1.5% to 3.5% from the year-ago quarter level. Excluding fuel and profit sharing, CASM is estimated to rise in the band of 0 to 2% in 2015. The carrier projects capacity to increase from 11% to 13% in the first quarter of 2015 and rise in the 7 9% range in 2015. JetBlue expects to pay off approximately $52 million and $265 million regularly scheduled debt and capital lease obligations by the end of the first quarter and full-year 2015, respectively. Expecting oil prices to remain weak, the carrier projects fuel costs at $1.97 per gallon (inclusive of fuel hedges and fuel taxes) for the first quarter. VALUATION JetBlue is currently trading at 11.0x our 2015 earnings estimate. This is at a discount to the industry average and the S&P 500. With respect to our 2016 earnings estimate, the stock is currently trading at 10.2x, again a discount to both the industry average and the S&P 500. The target price is $22.00, based on 13.3x the Zacks Consensus Estimate for 2015. Equity Research JBLU Page 4
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low JetBlue Airways Corporation (JBLU) 11.0 10.2 N/A 9.5 25.9 51.7 10.4 Industry Average 24.2 13.3 22.6 8.3 20.9 234.7 9.6 S&P 500 17.3 16.1 10.7 15.9 18.6 19.6 12.0 Ryanair Holdings plc (RYAAY) 19.0 16.6 26.4 15.7 20.4 23.9 11.1 Alaska Air Group, Inc. (ALK) 13.6 11.7 24.7 11.7 14.6 16.2 6.9 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA JetBlue Airways Corporation (JBLU) 2.0 2.0 0.7 9.9 0.8 0.0 6.4 Industry Average 3.4 3.4 3.4 14.9 1.2 0.8 9.3 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research JBLU Page 5
Earnings Surprise and Estimate Revision History Equity Research JBLU Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of JBLU. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1138 companies covered: Outperform - 16.1%, Neutral - 77.6%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research JBLU Page 7