JetBlue’s Recovery Is Underway – Earnings Preview (NASDAQ:JBLU)

The past nine months have been some of the most difficult any single airline has faced in the history of U.S. aviation. Almost a year ago, American Airlines Group Inc. (AAL) and JetBlue Airways Corporation (NASDAQ:JBLU) saw their Northeast Alliance – NEA – ruled to be anti-competitive and was ordered to be terminated by a federal judge, siding with the U.S. Dept. of Justice. Although the NEA began as an attempt by AAL to return usage of its New York LaGuardia and JFK airport slots to compliance with FAA slot usage requirements, the deal morphed into an expansive joint venture and slot-swapping exercise that did what the U.S. has never allowed two domestic airlines to do. While American and JetBlue had fought to preserve the deal, JBLU ultimately decided not to appeal the federal district court ruling while AAL says it continues to want to appeal so that the basis of law can be determined for future deals. The two airlines are in the final process of unraveling their deal.

The turbulence at New York City-based JetBlue intensified in the fall as JBLU’s losses deepened, and its stock fell far faster than the airline industry which saw worse than average stock performance in the second half of 2023. Intertwined with JBLU’s attempt to move forward its Northeast Alliance with AAL was a merger proposal with Spirit Airlines, Inc. (SAVE) that JBLU was committed to salvaging even with the defeat of the NEA. In January, another federal judge sided again with the DOJ in its objection to another major JBLU initiative, blocking the merger of the two airlines in a deal that would have been worth over $3.5 billion. Although SAVE originally had attempted to merge with Frontier Group Holdings, Inc. (ULCC), JBLU initiated a bidding war and ultimately prevailed in convincing SAVE’s board to support a merger proposal with JBLU. In convincing SAVE’s board to back a proposed deal, JBLU agreed to pay fees to SAVE shareholders while the approval process played out, ultimately resulting in hundreds of millions of dollars of cost which JBLU can’t recover. JBLU and SAVE were unable to overcome the DOJ’s objections to the elimination of competition and expected higher prices for consumers that would result if the deal went forward. To add insult to injury, the end of the SAVE merger attempt was the second failed merger attempt that JBLU had endured in less than ten years; it lost a bidding war with Alaska Air Group, Inc. (ALK) for Virgin America in 2016. With multiple failed strategies, a sinking stock price, and growing losses, it became increasingly clear that a change in leadership was needed at JetBlue.

Leadership and Strategy Changes

Former President and COO Joanna Geraghty replaced Robin Hayes. Geraghty, who has bent at JBLU for most of its existence of just over 2 decades, brought back former Chief Commercial Officer Marty St. George who spent 13 years at JBLU before working for a foreign airline; he also has experience at other U.S. airlines.

Sensing the upheaval and also the need for a strategic reset, hedge fund investor Carl Icahn purchased just under 10% of JBLU stock in February. Icahn’s reputation in the U.S. airline industry is negatively colored because of his involvement with iconic carrier Trans World Airlines – TWA – which was ultimately acquired by American Airlines after a difficult final chapter of life. His role at JBLU will likely be to accelerate and expand some of the strategies that Geraghty had already indicated she was planning to do.

At its core, JBLU lost focus on its core operation which originally was to be a high amenity low-cost carrier in the Northeast U.S., starting first in New York City – at JFK airport and then Boston as well as expanding into Florida with a large position at Ft. Lauderdale. JBLU leadership pushed size and a presence in other major markets faster than the company’s ability to deliver reliable service, resulting in JetBlue repeatedly ending up in the bottom tier of U.S. airlines for on-time. They pushed their fleet hard to extract more revenue but were unable to overcome frequent delays in major Northeast airports even though many of their direct competitors have posted much higher on-time performance even at the same airports.

Big Route Changes

JetBlue’s losses could undoubtedly be heavily traced to a list of routes many of which were outside their core Northeast -JFK and BOS – operations. Early indications of a financial turnaround at JBLU revolve around ending routes in the following airports:

New York LaGuardia -LGA- airport – as part of the Northeast Alliance, JBLU gained access to slots at LGA which AAL had not been able to use or operate efficiently; in return, AAL gained some slots at JFK airport particularly to increase international service. AAL is the second-largest slot holder at LGA behind Delta Air Lines, Inc. (DAL) and the 3rd largest slot holder at JFK behind DAL and JBLU. As part of terminating the NEA, AAL, and JBLU have to return each other’s slots and then seek federal approval for cooperation on a more limited basis than the NEA if they choose to cooperate in the future; neither AAL nor JBLU has indicated an interest in resurrecting any part of the NEA. JBLU will return most of AAL’s slots and vice versa within the next few months. The FAA has granted waivers to airlines in NYC because of ATC staffing which is likely to persist beyond 2024; these waivers will not only help push up fares with lower capacity but also reduce the number of flights that JBLU and AAL have to restart.

Los Angeles – LAX has been an important city for JBLU in part because it is the largest destination by revenue from JFK and BOS and both of those two city pairs are some of the largest in the country. However, JBLU developed an operation at Long Beach airport and maintained the dominant position at the small airport for a number of years; after upsetting the community which endured thousands of late JBLU night flights operating after the curfew, the city refused to build an international arrivals facility as JBLU desired. JBLU pulled down its Long Beach operation and bulked up its operations at LAX, directly competing against larger airlines and with fewer flights in many markets, a recipe for poor financial performance for any airline. JBLU is now reducing its presence in most LAX markets, predominantly serving its core NE routes.

Ft. Lauderdale – FLL – JBLU’s buildup in S. Florida seemed natural since NYC – S. Florida is the largest market in the U.S. by passengers carried, although there are multiple airport combinations. JBLU has managed to become the largest carrier based on its extensive service at FLL. FLL added service to a number of other cities including to the Caribbean and the northern tier of S. America. Competitively, the FLL market also attracted Southwest Airlines Co. (LUV) and SAVE. American operates the largest gateway to Latin America just down the road at Miami, making S. Florida to Latin America one of the most competitive markets. LUV pulled down many of its routes at FLL several years ago and the JBLU/SAVE merger would have reduced FLL to a single large low-cost carrier, part of the reason for the DOT’s objections. With the merger called off and SAVE in a stronger position in FLL due to its lower costs, JBLU cut several major routes including to several cities in S. America as well as on routes competitive with other airlines.

Improving Operational Reliability

Cutting underperforming routes is certain to free up airplanes which should take pressure off JBLU’s operation. Because JBLU has operated with such low on-time performance for so long, many frequent travelers have moved their travel to other airlines. The DOT tracks the reasons for flight delays and JBLU’s rate of “late arriving aircraft” is almost twice the national average. One of JetBlue’s most significant steps to rebuild consumer preference will come from improving its operational reliability and the number of schedule changes that have been published indicates that the company appears to be positioning itself to improve its on-time performance. Scheduling their aircraft less aggressively will leave some revenue on the table during good weather days, but that is the only proven way airlines have found to reliably operate in delay-prone airspace.

JBLU also faces the prospect of another year or more of aircraft out of service due to repairs on its Pratt and Whitney (a subsidiary of RTX Corporation (RTX)) Geared Turbofan – GTF – engines. While not impacted as much as some airlines like SAVE, JBLU has some A321NEO aircraft out of service and repairs are taking months due to Pratt’s inability to produce replacement parts at a fast enough rate for airlines to perform repairs in addition to commitments for engines on new-build aircraft. JBLU also states that it has 2 dozen contractual aircraft lease returns in 2024, slightly less than the 27 new aircraft it expects to receive. After factoring in the aircraft that are grounded because of the Geared Turbofan engine problems, it is clear why JBLU’s capacity for 2024 will be down for 2024, making it very difficult for a low-cost carrier to be profitable.

A Year of Rebuilding

Indeed, JBLU is guiding to “approaching breakeven” for 2024 as a whole, marking a long journey back to black for an airline that was once a Wall Street darling. In an industry where the best of times is often defined by single-digit profit margins and occasional double-digit margins at a few companies for a few parts of the year, JBLU is facing the compounding effect of its own strategies and the confluence of a number of external factors which are all making recovery a very difficult proposition.

Unless JBLU surprises with much stronger guidance than they offered just a month ago, the wisest investor strategy will be to cheer for JetBlue’s turnaround but wait on the sidelines for more clear signs of its arrival.