For JetBlue Airways (NASDAQ:JBLU), 2020 was supposed to be the culmination of a multiyear campaign to improve profitability. Back in late 2018, the airline set out an ambitious goal of growing adjusted earnings per share to between $2.50 and $3.00 by 2020. For comparison, the company posted adjusted EPS of $1.55 in 2018 and $1.90 in 2019.

As recently as January, management reiterated its $2.50 to $3.00 EPS target. Then, the COVID-19 pandemic swept across the U.S., causing air travel demand to evaporate. Now, JetBlue is on track to post a sizable loss this year.

The abrupt change in the outlook caused JetBlue stock to plunge from over $20 in February to a multiyear low of $6.61 in late March. However, following two months of extreme volatility, airline stocks began to rally in mid-May. Indeed, JetBlue stock has doubled since May 13, when it closed below the $8 mark.

JBLU Chart

Data source: YCharts.

After the recent rally, JetBlue shares have recovered more than half of the losses they sustained earlier this year. But while further gains will be tougher to come by, JetBlue stock still seems extremely cheap relative to the company's long-term earnings potential.

A strong balance sheet protects JetBlue

The huge sell-off in JetBlue stock earlier this year was an overreaction, because the company has one of the strongest balance sheets in the airline industry (second only to Southwest Airlines). Thus, it faces no meaningful risk of running out of cash -- or emerging from the pandemic with so much debt that it would be unable to function effectively.

Entering 2020, JetBlue had $3.15 billion of debt and lease liabilities on its balance sheet, offset by $1.34 billion of cash and short-term investments. This was a very manageable amount of debt relative to JetBlue's earnings power.

Over the past few months, JetBlue's debt load has expanded significantly as the airline has moved to bolster its liquidity. During the first quarter, the company borrowed $1 billion under a new 364-day term loan facility. This increased its total debt and lease liabilities to $4.02 billion. In April, JetBlue drew down $550 million from one of its credit lines. It also received $936 million of payroll support from the federal government, of which $251 million must be repaid.

As a result, JetBlue ended April with over $3 billion of cash and investments. So while gross debt (including lease liabilities) is approaching $5 billion, net debt didn't change all that much in the first four months of 2020.

A JetBlue Airways plane preparing to land

Image source: JetBlue Airways.

To be fair, JetBlue will still burn through a lot of cash in 2020. A month ago, management projected that JetBlue would burn a little less than $10 million per day in May and $7 million to $9 million per day in the third quarter, down from a peak of $18 million per day in late March. This suggests that it might burn through about $1.3 billion between May and September. However, JetBlue can easily absorb losses on that scale -- and it has ample capacity to raise additional debt if necessary.

Cash burn should recede quickly

Bears might note that it wouldn't take long for JetBlue's debt to swell to unmanageable levels if the company were to continue burning cash at anything like recent rates. Fortunately, there are signs that cash burn could slow soon.

JetBlue plans to operate about half of its initially planned schedule in July: up from about 10% last month. CEO Robin Hayes recently said that the airline is seeing green shoots of demand for summer vacation travel. That's good news for JetBlue, which is primarily a domestic leisure airline. The carrier also may be able to resume some of its routes to the Caribbean and Latin America -- many of which cater to the resilient visiting-friends-and-relatives (VFR) market -- this summer.

Furthermore, while fuel prices have rebounded from the lows seen in April, they remain far below 2019 levels. JetBlue's self-imposed restrictions on selling middle seats are currently set to expire after July 6, which could potentially allow the carrier to operate fuller flights later this summer. All of these factors suggest that JetBlue may burn less cash over the next few months than management previously anticipated.

Most importantly, JetBlue will have more flexibility to cut costs after Sept. 30, when the CARES Act restrictions barring layoffs and furloughs will expire. JetBlue hopes to avoid involuntary job cuts, but that option will be available as a last resort if improving demand and voluntary leaves of absence aren't sufficient.

The long-term story remains intact

Most airline executives think it will take years for demand to recover fully. Nevertheless, JetBlue should be able to get back to breakeven or a little better next year, assuming that demand continues to improve gradually.

Looking further ahead, JetBlue's recent profit-improvement initiatives will pay off once demand returns. The introduction of basic economy pricing will improve its customer segmentation capabilities. The carrier will benefit from structural cost reductions totaling over $300 million annually. It will shift its fleet toward larger, more modern aircraft, significantly reducing unit costs.

As a result, JetBlue is likely to be a more profitable airline once demand bounces back than it was over the last few years. EPS could zoom to $3 or more by 2023 (give or take a year, depending on the future course of the pandemic), with additional upside once JetBlue retires its inefficient Embraer E190 fleet in 2025.

The COVID-19 pandemic could also open up long-term growth opportunities for JetBlue, to the extent that other airlines cut capacity in JetBlue's focus cities. It could smooth the carrier's planned entry into the lucrative transatlantic market, too, by making it easier to acquire slots at crowded airports in Europe.

JetBlue shareholders must be prepared for significant volatility over the next few quarters. However, the company is unlikely to incur permanent damage in 2020, and EPS should surge to record levels within a few years. Even at its Monday closing price of $15.59 -- well above its recent lows -- JetBlue stock holds plenty of upside potential for patient, long-term investors.