JetBlue Airways (NASDAQ:JBLU) came into 2020 with high hopes. An industry darling during the years following its 2000 debut, the airline had fallen on hard times of late, plagued by sky-high expenses and inconsistent demand.
But management believed they were well on their way toward reversing those trends and getting JetBlue soaring again. A combination of network changes, fee increases, and about $300 million in annual cost cuts were supposed to help the airline to earn between $2.50 and $3 per share in 2020, up dramatically from $0.60 per share in 2018. JetBlue was also banking on continued growth of Mint -- its well-received premium service -- to help boost margins and attract premium flyers.
But all those ambitious plans have been brought down to earth by the COVID-19 coronavirus pandemic, which has caused travel demand to evaporate overnight.
Shares of JetBlue have lost 60% of their value year to date. Is now a good time to buy in? Here's a look at the current state of JetBlue, and what the future might hold for the airline and its shareholders.
It's only going to get worse from here
The pandemic is expected to drain about $252 billion in revenue from global airlines in 2020, and could put many on the brink of failure. U.S. airlines are relatively healthy compared to many of their foreign counterparts, and will be aided by $50 billion in government assistance. But the cuts have been drastic.
As of April 3, JetBlue has parked more than 100 aircraft and cut its April schedule by 70%. The airline is burning through more than $10 million per day and has seen daily bookings plummet by 95% year over year.
"Just a few weeks ago, we couldn't get new aircraft fast enough to hit our growth plans," CEO Robin Hayes wrote in an early April memo to employees. "Now, we are taking steps to sit down the aircraft we have."
JetBlue ended the year with $1.3 billion in unrestricted cash on its balance sheet, and on March 18 said it had secured a new $1 billion credit line to help ride out the storm.
That, coupled with government assistance, is likely ample to get the airline through the expected curve of the pandemic. But airlines face an uncertain future once the outbreak has subsided. It is growing increasingly clear that the U.S. is heading into a recession, and if history is a guide, airlines are likely to see depressed demand through the rest of 2020 and potentially into 2021.
The airlines today are in a race against the clock to see if travel demand rebounds before the cash runs out. I'm optimistic, but it is by no means certain. And JetBlue doesn't have any of the characteristics likely needed to be a high-flyer should travel return but at typical recessionary levels.
Airlines will make it, but will this airline make it?
The issue for JetBlue is that it has neither the heft and balance sheet of a major airline, nor the cost structure to compete with ultra-discounters. Backing out fuel expenses, it cost JetBlue 8.31 cents to fly one passenger one mile in the fourth quarter of 2019. By comparison, uber-discounter Spirit Airlines spent 5.67 cents per seat during the same three months.
Few would argue that is a like-for-like comparison. Spirit is the butt of a lot of late-night television jokes because it charges for everything, from beverages to carry-ons, while JetBlue has carved a loyal following in its native New York and has worked for years to refine its Mint premium offering.
But if the next few quarters play out the way I believe they will, having a premium offering might not be much of an advantage. Should the pandemic cause a sustained recession, airlines historically have had little luck attracting corporate business or premium travelers, instead needing to dramatically drop fares to stimulate budget-conscious leisure travelers and fill their planes.
That's not JetBlue's game. Larger airlines offer more complete networks, and discounters like Spirit can use their cost structure to profitably undercut fares.
So is JetBlue a buy?
The bull case for JetBlue coming into 2020 was that the Mint product and planned structural changes would help the airline to drive greater earnings growth than the industry average, or if they didn't, the company would end up the subject of takeover speculation. Right now, neither scenario seems likely.
The near-term future for JetBlue and the other airlines is uncertain. At best we appear headed for a slow, arduous climb as the industry fights through a recession. At worst, the pandemic isn't contained as quickly as hoped and airlines run out of cash.
I believe the worst-case scenarios are unlikely to materialize, and the airlines, though risky, are intriguing buys at these levels. But most of the industry has been discounted as much, if not more, than JetBlue shares in 2020. Given the risk, I'd prefer to buy into best-of-breed larger airlines.
If nothing else, JetBlue's rebound appears at best to be a 2021 story instead of a 2020 story. That's a lot of time to wait in an uncertain environment. I'm not buying JetBlue today.