JetBlue Airways(NASDAQ:JBLU) opened Monday at $8.38 but still down 50% YTD as the entire travel sector goes down a pandemic-induced spiral. Analysts predict that the company, like all it’s peers, will report a loss of -$0.42 per share when it releases it’s numbers on Tuesday(Nasdaq). In an interview with Yahoo Finance, JetBlue Chairman Joel Peterson stated that everybody at the company and the industry are now just trying to weathering the storm.(Yahoo Finance)
The company, that used to operate 1000 flights a day, is now running at 10%-15% of it’s schedule with April traffic down 90% as demand has disappeared due to health risks. JetBlue chief executive Robin Hayes very recently said in an interview that he feels the industry is at its bottom and he expects it to be there till June.(CNBC)
Financial Position –
The company is now focused on financial health, it has received a little less than a billion dollars under the CARES Act, of which $685 million is a grant to cover expenses till end September and the remaining $250 million is a low interest loan. As a pre-condition of the stimulus package, the airline had to agree to provide route coverage on some unprofitable routes, it plans to do so by providing hopping flights rather than direct ones, in an effort to save expenses. Apart from the government stimulus package, the airline also borrowed an additional $1 billion of debt in March.
The BUY case –
Until the pandemic spread is contained, all airlines stocks are in the same boat, trading between a 40%-60% discount of their pre-pandemic highs. There is also the risk of the demand not recovering well even after the virus is contained as the public may be wary of close contact travel until a vaccine is widely available.
As the sector waits for a rebound, JetBlue management is in unique position to take advantage of this situation. The stock ended the last financial year, with cash reserves of $1.3 billion and $700 million of extendable credit lines. This was before the the new debt raised and the government stimulus package.
The airline had previously announced and commenced plans to refurbish it’s A220’s to increase their capacity, a decision expected to create $70-$80 million of new revenue a year. It is much easier to make these changes in situations like these when demand is low and hence opportunity cost is also low.
Also the fact that JetBlue is mainly a origin and destination airline, that it mainly operates directly between two destinations rather than a hub based one, where passengers from all flights arrive at a hub and then go on to their end destination, should make it easier for them to resume operations without major delays and cheaply when demand rebounds.
Also compared to the average S&P P/E multiple of 20x, the airline industry is ultra cheap at a multiple of a little under 5x. Based on these factors the company seems like a strong buy for long-term investors.