It has been a while since I have flown, but my family is going to Chicago in a month. As I was looking around at flights, I start thinking about the industry. Flights, for what it is worth, seem reasonably priced. I happen to be flying Southwest Airlines Co. (LUV, Financial), but that is only because JetBlue Airways Corp. (JBLU, Financial) was not a direct flight.
In terms of capital markets, Southwest is priced 9 times higher than JetBlue; however, from a business standpoint, it is not 9 times more valuable. While both companies and the industry at large serve a major role in society, JetBlue looks like it could generate better than industry average growth going forward.
A former disruptor
JetBlue was founded in 1998 by David Neeleman, with its first flight taking off in 2000. The airline is based out of John F. Kennedy International Airport in New York City and primarily serves destinations within the U.S., but it also has a number of international routes to the Caribbean, Central America and a few in South America. The fleet primarily consists of Airbus (XPAR:AIR, Financial) and Embraer (ERJ, Financial) aircraft.
The company was one of the first to enhance the customer experience at a competitive price, especially within the domestic U.S. market. Some features it has been recognized for include more leg room in standard economy, free in-flight entertainment and complimentary high-speed Wi-Fi. These were very novel 20 years ago and now replicated by every domestic airline. That said, JetBlue still has high brand value and still offers an affordable option that does not skimp on comfort.
New routes
JetBlue flies to nearly 100 destinations in over 20 countries across North America, Central America, the Caribbean and South America. The busiest domestic bases are New York, Boston, Fort Lauderdale, Orlando and Los Angeles. In fact, the coompany dominates many routes connecting Northeast cities to Florida, like New York to Fort Lauderdale, Tampa and Orlando. Florida is JetBlue's second-biggest base after New York. The Boston market is one of its standout performers with high fares and strong local demand on routes like Boston to D.C., Chicago and California.
More importantly, the company has started to service new international routes. In 2021, JetBlue began flying to London from both New York and Boston, marking its entry into the competitive transatlantic market. In June of this year, it expanded the service to Paris.
This move was significant as it promised to bring JetBlue's reputation for service and value to flights between the U.S. and Europe. New York is the most visited American city by Europeans with around 5 million visitors a year pre-pandemic and over 20% coming from United Kingdom. Going the other way, more than 11 million Americans visit Europe specifically, and around 3 million go to Paris. The international service is just getting started, which makes this one of the best future profit centers for JetBlue.
On the whole, JetBlue only has around 400 unique routes and handles less than 900 flights per day. That number could get a lot bigger and, if it kept the same profitability rate per flight (see below), it would equate to significant growth from the current revenue output.
Safety record
Flying is as safe as it has ever been, domestically, something many people take for granted at this point. JetBlue has a stellar air safety record. In terms of accidents, the company has seen only minor incidents like runway tail strikes, resulting in limited aircraft damage and no injuries. The airline has never had a fatal passenger accident in its history and has one of the safest operational records of any major U.S. airline.
JetBlue's fleet is young, with an average aircraft age of just under 10 years as of 2022. Newer model planes are safer and more reliable. The airline has orders to further upgrade its planes. It was an early adopter of many new safety technologies like satellite-based navigation, enhanced pilot training programs and an FAA-approved Safety Management System. JetBlue regularly scores well above average in government audits on areas like pilot training, aircraft maintenance and ground operation safety compliance.
Brand options and customer loyalty
Aside from convenience for premium flyers, the top method airlines use to foster customer loyalty is through frequent flyer programs. Members earn miles or points based on the distance flown, fare class or the ticket price. Airlines collaborate with credit card issuers to offer co-branded charge cards that often allow customers to earn miles on everyday purchases, with bonus miles for purchases made with the airline.
JetBlue has this, too, but I just always wonder for the rest of us flyers not sitting in first class, how can American Airlines Group Inc. (AAL, Financial), Delta Air Lines Inc. (DAL, Financial) and United Airlines Holdings Inc. (UAL, Financial) continue to garner such a customer base despite on average costing more per ticket? There are no other options. Sure, the big airlines have a brand that premium users may stick with because of the perks, but for everyone else, once the seats fill up on JetBlue or Southwest, you have to fly American, Delta or United.
It is easy to see why Warren Buffett (Trades, Portfolio) has a love-hate relationship with airlines. People love to fly, but there are limited options in terms of airlines to fly with, airports to fly out of and destinations to reach. The demand to fly heavily outweighs supply. Yet it is still a hard business and airfare is still pretty cheap, which is a big reason why JetBlue’s market capitalization is the same today as it was in 2002.
Valuation
All the airlines have been hit hard this year and most may be undervalued; however, JetBlue seems to be the most mispriced with the greatest upside due to the new flight routes. The comapny is closing in on $10 billion in annual revenue turnover at a 27% gross profit margin. It has around 850 fights per day and generates just over $32,000 per flight on the top line. That’s on par with Delta and United.
Southwest, by comparison, generates just shy of $21,000 per flight, the lowest of the top domestic airlines. However, the company is consistently more profitable, for now. As for JetBlue, the company is currently priced at just 25% of sales, 60% of book and just 3 times cash flow. Yet, on a five-year average, it is growing at 22% year over year on the top line, has plenty of liquidity and very little debt to service.
The company had a rough time during the pandemic. Its stock seems to have been unfairly punished, more than most in the industry. Its margins are in line with the majors and, in time, growth will yield to profitability. Unless humans invent a better mode of transportation, airlines will continue to be viable and JetBlue will likely be much more valuable.
