JetBlue Airways Turns From Laggard To Head Of Pack

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I n an industry of vanished perks,JetBlue Airways ( JBLU ) has long stood out from its peers for offering everyday amenities, such as generous leg room and free baggage checks, at no extra cost.

It famously led the way in placing TVs in front of passenger seats, now ubiquitous on most airlines.

But going the extra mile for passengers didn't translate into extra dollars, analysts and investors complained. Unit revenue and ancillary sales, which include baggage fees, lagged peers.

"The fact of the matter is, customers have not shown a willingness to pay more for a better product," said Jim Corridore, airline equity analyst with S&P Capital IQ.

JetBlue isn't lagging peers anymore. "It's clearly outperforming at this point," said Helane Becker, an analyst with Cowen & Co.

"Unit revenue has outperformed the industry. Their balance sheet has improved dramatically. You can see that in the stock price," up about 63% year-to-date.

What changed? JetBlue's relatively weak financial and stock performances led to a series of changes that cut away some perks and added a premium business class at a price below rivals.

Several executives left last year, followed by the announcement in September that CEO Dave Barger would leave when his contract expired in February of this year.

New Captain, New Initiatives

He was replaced by company executive Robin Hayes, a former British Airways executive, who also holds the title of president.

Under Barger's final months, the firm implemented some new initiatives to get customers to pay up for more, such as a premium "Mint" business-class service launched in mid-2014 on flights between New York and the West Coast. It'll be expanded to flights between Boston and San Francisco in March.

At the end of June, JetBlue started charging for bags that used to fly free, part of "Fare Options," a new tiered pricing scheme that still includes free checked bag options.

For this past September, Deutsche Bank projects that JetBlue will have been the only airline of the top six U.S.-based carriers to show a year-over-year increase in passenger revenue per available seat mile -- up an estimated 2%. It forecast declines of 3.5% atSouthwest Airlines ( LUV ) and up to 7% declines atAmerican Airlines ( AAL ).

On Friday,Delta Air Lines ( DAL ) was the first of the carriers to report on September: unit revenue was down 5%.

Beginning in mid-2016, JetBlue will add 15 more seats to A320 aircraft, for a total of 165 seats. But analysts say that its leg room will still be more generous than the competition's.

JetBlue says that all of the new initiatives will add $450 million in operating income, starting in 2017.

In a research note last month, the Buckingham Research Group estimated that the current Mint service alone likely generates an incremental $120 million in revenue and 10 cents per share annually. If expanded to the airline's other routes of 2,000 miles or more, the report noted, it could translate to $500 million in incremental revenue and 40 cents in earnings.

JetBlue is the fifth largest U.S.-based airline by revenue, after Delta, American,United Continental ( UAL ) and Southwest.

The New York-based carrier flies to more than 90 cities in the U.S., the Caribbean and Latin America. Its leading markets are New York, Boston, Fort Lauderdale, Los Angeles, Orlando and San Juan, Puerto Rico. Service to Mexico City launched on Oct. 1 from Orlando and Fort Lauderdale.

JetBlue is essentially positioned between the consolidated legacy carriers, with their extensive routes, and ultralow-fare airlines such asSpirit Airlines (SAVE) andAllegiant Travel (ALGT), which boost cheap fares with add-on fees.

"It still has lower costs than peers, but it is not a low-fare carrier in the traditional sense," Corridore said.

While changes made so far have already had a positive impact on JetBlue's financial performance, so have lower fuel costs and easing competition in key markets.

JetBlue is benefiting from rivals' relatively low-capacity increases in its key markets New York, Boston and Fort Lauderdale, Becker says.

While capacity increases are up around 3% in JetBlue markets, she adds, the airlines' average is somewhat higher, and some markets such as Seattle and Dallas are up in the double digits.

"Nobody's really been growing aggressively in New York and Boston and to some extent Fort Lauderdale, which are all big markets for JetBlue," she said.

Operating income in the second quarter doubled from a year earlier to $282 million. Per-share earnings jumped 132% to 44 cents per share.

Passenger revenue per available seat mile -- a closely watched metric in the airline industry -- increased 1.4%. Revenue passenger miles rose 8.7% on a capacity increase of 7.5%, for a load factor of 85.6%, up 1 percentage point.

Meanwhile, JetBlue's operating expense per available seat mile decreased 8.6%. Excluding fuel and profit sharing, it rose a slight 0.6%.

With lower oil prices and only 19% of its fuel consumption hedged, JetBlue's realized fuel price in the quarter fell 31% to $2.13 per gallon.

Oil Eases Slower Sales Growth

Lower-priced oil -- down more than 60% from a year ago -- is a "good trade-off" to slower growing airline-industry revenue this year, Corridore says. Jet fuel accounts for a third of an airline's costs.

With domestic revenue growth slowing, capacity growth in the industry will remain tempered, analysts say. That's unlike past stretches following oil-price declines, when airlines would order new planes using their excess cash.

Now U.S. carriers (JetBlue included) have been using excess cash to buy back shares and pay down debt, noted Goldman Sachs analysts in a report on Sept. 30.

Still, JetBlue expects capacity to increase at the high end of its 7%-to-9% range for the full year. It sees operating expenses per available seat mile rising 0% to 1.5%, excluding fuel and profit-sharing.

The airline's earnings for the year are seen as growing 170% over last year to $1.89 per share, according to Thomson Reuters.

More tailwinds could be ahead for JetBlue. The carrier's strong presence in Florida, especially South Florida, should put it in a favorable competitive position when travel to Cuba opens, Corridore says. "Cuba could be a lucrative market for them," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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