Between 2014 and 2016, earnings soared at JetBlue Airways (NASDAQ:JBLU) on the back of falling fuel prices and the success of the carrier's disruptive "Mint" premium transcontinental service. But since then, shareholders haven't gotten much good news out of the the company's earnings reports. JetBlue has seemed powerless to stabilize its profitability in the face of a rapid rebound in fuel prices.

On Tuesday morning, JetBlue reported another substantial earnings decline for the third quarter of 2018. However, the carrier did point to improving trends that should help it return to earnings-per-share growth as soon as the current quarter.

JetBlue Airways results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$2.01 billion

$1.82 billion

10.5%

Total unit revenue

12.91 cents

12.70 cents

1.7%

Adjusted cost per available seat mile excluding fuel

8.27 cents

8.02 cents

3.2%

Adjusted net income

$134 million

$181 million

(26%)

Adjusted pre-tax margin

9%

16.3%

N/A

Adjusted EPS

$0.43

$0.55

(22%)

Data source: JetBlue Airways Q3 earnings release.

What happened with JetBlue Airways this quarter?

The last few months have been eventful for JetBlue, as the carrier has looked to improve its long-term profit trajectory. Early in the third quarter, it announced plans to replace its high-cost E190 fleet with 60 state-of-the-art Airbus A220s between 2020 and 2025.

JetBlue estimates that the new Airbus A220s will be up to 29% cheaper to operate than its E190 fleet on a per-seat basis. The A220 also has significantly more range than the E190 and can be used on transcontinental flights. As a result, management expects the transition to the A220 to increase pre-tax margin by 3 percentage points and EPS by $0.65 by 2025. That said, JetBlue is incurring some additional costs in the short term.

During the quarter itself, JetBlue continued to face severe margin erosion. Rising labor costs related to a new pilot contract offset the company's cost-savings initiatives, while fuel prices continued to skyrocket. JetBlue's 1.7% increase in revenue per available seat mile (RASM) wasn't nearly enough to make up for these cost headwinds.

Just after the end of the quarter, JetBlue revealed ambitious targets for earnings growth over the next two years. JetBlue hopes to roughly double EPS to a range of $2.50 to $3.00 by 2020 by implementing already planned cost-savings initiatives, adding seats to each of its 130 Airbus A320s, moving capacity from underperforming markets to higher-margin routes, and driving ancillary revenue growth.

What management had to say

In his comments accompanying the earnings release, CEO Robin Hayes noted that JetBlue's recent financial results haven't been up to par. However, he pointed to better times ahead:

Our financial performance was impacted by fuel prices that increased approximately 37% year over year. ... We are taking actions to recapture higher fuel costs through price -- both with fare increases over recent months and through higher ancillary revenue initiatives. At our Investor Day in early October, we showed how our five building blocks will help us improve our margins and achieve our earnings target between $2.50 and $3.00 per share by 2020.

JetBlue was more satisfied with its performance on the cost side of things. "We continue to see sequential improvement in our underlying non fuel costs, and reached an inflection point during the second half [of] this year, as we execute our Structural Cost Program. We are confident we can deliver on our 2019 commitments made at Investor Day," said CFO Steve Priest.

Looking forward

For the fourth quarter, JetBlue expects RASM to rise 1% to 4%. At the midpoint of that range, JetBlue's projected RASM growth is lower than what many of its rivals are expecting. That's unfortunate, given that the all-in cost of jet fuel is on track to hit $2.48 per gallon this quarter, up from $1.89 per gallon a year earlier.

A JetBlue Airways plane preparing to land

Rising fuel costs remain a big earnings headwind for JetBlue. Image source: JetBlue Airways.

On the bright side, JetBlue's guidance calls for a 1.5% to 3.5% decline in adjusted non-fuel unit costs this quarter. Additionally, oil prices have moderated somewhat recently, so it's possible that fuel costs will come in a little lower than JetBlue currently expects.

If JetBlue were to hit the high end of its RASM forecast and the favorable end of its cost guidance, its pre-tax margin would be roughly flat year over year in the fourth quarter. Otherwise, it is likely to report yet another pre-tax margin decline. But even in a worst-case scenario, JetBlue's rate of margin erosion should moderate due to the combination of easier year-over-year comparisons and better underlying cost trends.

Finally, a lower federal tax rate and JetBlue's share repurchases (which have reduced its share count) both represent powerful EPS tailwinds for the fourth quarter. As a result, the midpoint of JetBlue's guidance range implies that adjusted EPS will return to growth this quarter. Future earnings trends will depend more on the success of JetBlue's revenue and cost initiatives.

Adam Levine-Weinberg owns shares of ERJ and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends ERJ and JetBlue Airways. The Motley Fool has a disclosure policy.