JetBlue Airways Is Well-Positioned To Survive And Grow

The travel and tourism industry took a beating last year and according to the International Air Transport Association (IATA), 2020 was the worst year in the history of air travel demand.

This translated into big losses for the airline industry with IATA estimating industry losses at $118.5 billion. The pain is likely to continue in the current year with estimated losses of $38.7 billion.

In the current environment, it’s all about survival rather than pushing for growth.

JetBlue Airways (JBLU) is one airline company that seems well-positioned to navigate the crisis. The company’s stock has trended higher by just over 100% in the last year and it seems likely that the positive momentum will sustain.

An important factor from a recovery perspective is the vaccination drive against COVID-19.

Currently, 109 million people, which constitutes 33% of the U.S. population, have received at least one COVID jab and 64 million have been fully vaccinated with two shots of either the Pfizer (PFE) or Moderna (MRNA) vaccine.

It seems very likely that the country is on course to vaccinate a majority of the population within the next 2-3 quarters. This is good news for the travel and tourism industry beyond the current year.

A Strong Financial Profile

In challenging times, it’s important to look at the credit profile of a company as credit health is the differentiating factor between the winners and the losers.

JetBlue Airways is well-positioned on that front.

The company ended Q4 2020 with a total liquidity buffer of $3.1 billion. With an adjusted debt to capitalization rate of 57% for the same period, the company has ample headroom for leveraging. Furthermore, the company reported total debt of $4.4 billion for FY2020 with total flight equipment of $7.8 billion. This implies a loan-to-value of 57%.

It’s also worth noting that the company’s all-in cash burn averaged $6.7 million per day in Q4 2020. One of the strategic priorities of the company is to reduce cash burn, however, if cash burn is assumed at $6.7 million per day through 2021, JetBlue Airways would need a total liquidity buffer of $2.5 billion. Current liquidity implies that the company is fully financed for potential cash burn through the year.

These numbers reflect that the airline has significantly low credit stress levels compared to the likes of American Airlines (AAL) and United Airlines (UAL).

Credit default spread is a good indicator of potential bankruptcy. In May 2020, when sentiment around the airline industry was very bearish, JetBlue Airways had a CDS of 1.6%. In comparison, American Airlines’ CDS was trading at a spread of 54% while United Airlines’ CDS rate was 24%.

The key point here is that the most challenging times expose companies with weak balance sheets. JetBlue’s CDS indicates that the airline is among the best positioned in the industry from a credit perspective.

Wall Street’s Take

Analysts on Wall Street hold a cautiously optimistic view on JBLU stock with a Moderate Buy consensus rating based on 7 Buys and 6 Holds. The average analyst price target of $21 implies that JBLU shares are fully priced at current levels. Analyst price targets range from a low of $14 to a high of $30 per share. (See JetBlue stock analysis on TipRanks)

Concluding Analysis

JetBlue Airways seems to be doing the groundwork for the next leg of growth. As an example, the airline has more than 80 new routes to support top-line growth and cash flow upside. The impact of this move will be seen once there is an uptick in passenger traffic.

Furthermore, the airline has also initiated some permanent reductions in fixed costs. This is likely to boost EBITDA margins once capacity utilization increases. It’s worth noting that in FY2019, JetBlue generated $1.4 billion in operating cash flows. If cash flows get back to those levels in the next 12-24 months, JetBlue will be well-positioned to de-leverage.

Overall, JBLU stock still looks attractive despite its impressive rally over the past 12 months. If the airline industry’s recovery accelerates towards the second half of the year, JetBlue Airways may be well-place to report healthy numbers.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.