JetBlue Airways (NASDAQ:JBLU) delivered strong results in the first quarter of 2018, growing earnings per share despite a big increase in fuel costs. Nevertheless, JetBlue stock fell after the company's earnings report and has been stuck near its 52-week low. The main reason for investors' lackadaisical response to JetBlue's earnings report was the carrier's forecast that unit revenue will decline and pre-tax profit will plunge in the second quarter.

On Tuesday, JetBlue narrowed its second-quarter revenue guidance range, thus confirming that revenue per available seat mile (RASM) will decline. This news helped to keep JetBlue stock grounded this week. However, investors may be underestimating JetBlue's near-term and long-term revenue and earnings potential.

Q2 is coming in as expected

JetBlue's RASM surged 6.1% in the first quarter, driven in part by a shift in the timing of Easter. By contrast, JetBlue warned investors in April that the early timing of Easter and one-time factors that boosted unit revenue a year ago would negatively impact RASM by 3.75 percentage points in Q2.

Additionally, JetBlue's management noted that demand has been very strong on peak days, but overcapacity has held down fares on non-peak days. The second quarter of 2018 hasn't had very many peak days. As a result, JetBlue initially projected that RASM would decline 0% to 3% year over year this quarter.

A JetBlue plane preparing to land

JetBlue expects its unit revenue to decline this quarter. Image source: JetBlue Airways.

On Tuesday, it updated that forecast, stating that unit revenue is on track to fall 0.5% to 2.5% for the quarter. Thus, the midpoint of the guidance range stayed unchanged, but the range was tightened from 3 percentage points to 2 percentage points.

A lesson for airline investors

A day before JetBlue updated its guidance, United Continental (NASDAQ:UAL) announced that its load factor -- the percentage of seats filled with paying customers -- rose by 2.0 percentage points in May, reaching 83.6%. Investors took this as a sign that United is seeing strong demand, causing United Continental stock to rally on Monday.

However, it's noteworthy that JetBlue's load factor is also rising. In April, the carrier's load factor increased by 0.4 percentage points to 85.7%, despite the unfavorable timing of Easter. In May, its load factor rose by 1.1 percentage points to 85.8%.

JetBlue is maintaining its forecast for unit revenue to decline this quarter despite its strong load factor performance. This highlights the fact that airlines actively make trade-offs between fares and load factors. As many airlines have stopped providing regular updates on unit revenue, investors have started to put more weight on load factor results -- as was the case with United's recent stock surge. That's dangerous, because load factor improvements don't necessarily translate to unit revenue.

Revenue trends should rebound in the second half of 2018

Looking ahead, there are several reasons to be optimistic about JetBlue's prospects. First, the carrier will benefit from more peak days during the summer season and around the Thanksgiving and Christmas holidays. Second, the carrier is making drastic cuts in Long Beach -- its smallest and least successful hub -- after Labor Day. Third, JetBlue is starting to benefit from capacity cuts by rivals (particularly Alaska Air) on certain routes.

These factors should allow JetBlue to accelerate its unit revenue growth in the second half of 2018, relative to the 2% to 3% underlying RASM growth rate it has seen in the first half of the year. Beyond 2018, the success of JetBlue's Mint premium service -- and a potential expansion of Mint service to Europe -- could help drive further unit revenue gains.

Meanwhile, a variety of cost control initiatives are set to pay dividends starting in the second half of 2018. These efforts will allow JetBlue to keep non-fuel unit costs roughly flat over the next three years, despite the likely headwind from increased pilot pay. Fuel efficiency should also improve substantially.

JetBlue stock trades for a very modest valuation of 11 times its projected 2018 earnings per share and just 9 times projected 2019 EPS. That leaves plenty of room for JetBlue stock to zoom higher, if the carrier can get unit revenue growing faster in the second half of the year while slowing its non-fuel unit cost growth.