The four largest U.S. airlines often steal the bulk of investors' attention. However, shares of Alaska Air (NYSE:ALK) and JetBlue Airways (NASDAQ:JBLU) -- the No. 5 and No. 6 airlines in the country, respectively -- have also been strong performers during the past few years. Furthermore, Alaska Air and JetBlue have more growth potential than their larger rivals.
Both carriers posted somewhat disappointing results in the first quarter of 2017. However, they are on track to return to profit growth in the second quarter. The outlook for the rest of 2017 and beyond looks promising as well.
JetBlue's unit revenue rebounded last quarter
During the first half of 2016, JetBlue's revenue per available seat mile (RASM) plunged 7.6% year over year. That set up an easy comparison for JetBlue to return to unit revenue growth in the first half of this year.
However, in the first quarter, JetBlue faced overcapacity in many of its markets. The calendar shift of Easter into April (after falling in March 2016) also negatively impacted JetBlue's first-quarter unit revenue. As a result, RASM slumped 4.8%.
Fortunately, JetBlue got back on track last quarter. The carrier has reduced its capacity in underperforming markets and implemented some revenue management changes. Additionally, the timing of Easter turned into a tailwind in the second quarter. Finally, JetBlue had to cancel an unusually high number of flights during the second quarter (mainly due to bad weather), which had the side effect of boosting unit revenue.
The net result is that RASM rose approximately 7% at JetBlue last quarter, according to JetBlue's June traffic release. That's above the high end of the company's original forecast for a 3%-6% increase.
Thanks to this upgraded revenue outlook, JetBlue probably generated strong earnings-per-share growth last quarter, despite facing significant headwinds from both fuel and non-fuel costs. Prior to this update, most analysts had been predicting that JetBlue's EPS would decline slightly in the second quarter.
Alaska Air offers a solid update, too
Alaska Air also disappointed investors with a steep earnings drop in the first quarter, but it too is set to rebound in the second quarter.
In an investor update published on Wednesday, Alaska Air projected that RASM increased about 3.5% year over year last quarter. That's not as impressive as JetBlue's revenue performance, but Alaska is still in the early stages of integrating Virgin America.
While Alaska Air didn't face quite as much cost inflation as JetBlue in the second quarter, its profit margin still almost certainly slipped on a year-over-year basis. On the other hand, revenue surged about 40% due to the impact of the Virgin America acquisition. This puts Alaska Air on track for double-digit EPS growth.
The outlook is good as growth accelerates
Both JetBlue and Alaska Airlines are set to increase their capacity growth in the second half of the year, particularly in the fourth quarter. In the short run, this could limit their unit revenue growth potential.
However, faster growth will help push down unit costs. In fact, Alaska Air's current guidance calls for non-fuel unit costs to drop year over year in the second half of 2017. Meanwhile, non-fuel unit costs should be close to flat at JetBlue. Fuel cost inflation will also subside in the second half of the year. (Airlines could even benefit from year-over-year fuel price declines by the fourth quarter.)
Additionally, it's important to recognize that JetBlue Airways and Alaska Air both have compelling growth opportunities. JetBlue is in the midst of a major expansion of its popular Mint premium service on transcontinental routes. Alaska is capitalizing on Virgin America's strong position and loyal customer base in San Francisco to expand significantly there.
JetBlue and Alaska will surely encounter ups and downs as they carry out their expansion plans. But their above-average growth rates have been a key reason for their success up to this point -- and there's no reason why that should change in the future.