Better Times Ahead for JetBlue Airways Corporation

JetBlue Airways Corporation (NASDAQ: JBLU  ) , once the darling of airline investors, has had a rough time recently. From hurricanes to spiraling cost increases to massive delays and flight cancellations, JetBlue has seemed to go from crisis to crisis. As a result, in 2012 and 2013, the company fell short of its goal of improving its return on invested capital by one percentage point annually. 

Fortunately for investors, JetBlue is on a path to significantly higher profitability in 2014 and beyond. The company has reduced the risk of unmanageable cost inflation and implemented programs that will boost revenue. Additionally, travelers do not appear to be punishing JetBlue for its poor operational performance earlier this month. As a result, investors should benefit from solid earnings growth in the next two to three years.

Holding down costs
While JetBlue did not quite meet its return target for 2013, the company still managed to grow net income by more than 30% year over year to $168 million. JetBlue's gains were driven by the overall strength of the airline industry, offset to some extent by a massive 28% increase in maintenance costs due to engine problems with its Embraer (NYSE: ERJ  ) 190 fleet. 

JetBlue already generated strong earnings growth in 2013. Source: JetBlue.

To address that problem, JetBlue signed a long-term contract with engine manufacturer General Electric (NYSE: GE  ) to maintain its E-190 engines going forward. This will bring greater predictability to JetBlue's maintenance costs and lead to year-over-year declines in the first half of 2014. 

JetBlue will also benefit in 2014 and beyond from a shift in its aircraft fleet away from the Embraer 190 in favor of more cost-efficient Airbus aircraft, especially the A321. JetBlue just took delivery of its first four A321s last quarter, but it plans to grow the A321 fleet to more than 80 aircraft by the end of the decade! This will play a big role in offsetting other cost growth drivers over that time.

Strong outlook
JetBlue was tripped up by winter storms and frigid temperatures earlier this month, which forced the cancellation of 1,800 flights in the span of a week. This event will increase JetBlue's Q1 non-fuel unit costs by roughly three percentage points. In spite of that headwind, JetBlue expects non-fuel unit cost growth of just 3%-5% this quarter. In other words, excluding the impact of the storm, non-fuel unit costs would have barely budged. 

Better still, JetBlue has not seen a slowdown in demand from its recent operational problems. JetBlue President Robin Hayes stated on the earnings call that the Q1 revenue outlook was strong. Big unit revenue gains in January and February should more than offset an unfavorable calendar shift in March, as Easter moves back into April. That will lead to solid earnings growth this quarter.

Looking ahead, the Easter calendar shift will have a significant benefit to JetBlue's Q2 earnings. Later in the year, and continuing into 2015, the introduction of JetBlue's premium "Mint" transcontinental product -- which includes JetBlue's first business class section -- should drive profit growth.

Foolish bottom line
A few weeks ago, it looked like JetBlue might have lost its momentum because of its poor performance during the early January winter storms. However, the company appears on track to grow earnings this quarter in spite of that significant headwind. Additionally, bookings for the rest of the quarter continue to look strong, which suggests that most travelers are willing to give JetBlue another chance.

As a result, JetBlue Airways should see strong profit growth over the next several years as it benefits from more predictable maintenance costs, more efficient aircraft, and the rollout of its "Mint" premium transcontinental service. In light of these opportunities, JetBlue seems attractively valued at around 16 times trailing earnings. 

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