JetBlue Airways (JBLU -1.15%) stock got a big upgrade from J.P. Morgan analysts last Wednesday. Less than 24 hours later, however, Fitch -- one of the three major credit rating agencies -- cut the airline's credit rating to junk territory. 

These dueling changes to ratings highlight the substantial uncertainty about airlines' short- and medium-term prospects. Let's take a look at the justifications for the analyst moves and what they mean for JetBlue stock moving forward.

JetBlue stock gets a boost

J.P. Morgan analyst Jamie Baker downgraded JetBlue to an underweight rating (the equivalent of sell) in June following a furious rally that saw JetBlue stock surge nearly 90% in just a few weeks. At the time, Baker correctly predicted that airline stocks' momentum couldn't last.

JetBlue shares have subsided since then, pulling back about 20% from their early June high. That, along with continued progress toward vaccines, prompted the J.P. Morgan analyst team to turn bullish again. On Wednesday, the brokerage upgraded JetBlue stock to outperform and raised its price target to $17, well above the stock's current trading price.

JBLU Chart

JetBlue Stock Performance. Data by YCharts.

Interestingly, Baker is not especially bullish about JetBlue's near-term prospects. He believes that demand is not living up to management's expectations. However, the analyst argues that the airline will respond to any demand shortfall with additional cost cuts to trim cash burn. Moreover, JetBlue has ample cash to make it through the next year and is well-positioned to capitalize on a rebound in demand in 2022.

Fitch sounds a note of caution

Credit analysts at Fitch were more cautious about JetBlue last week, downgrading its long-term issuer default rating to BB-, or three notches below investment-grade status. Entering March -- just before the pandemic crushed U.S. air travel -- Fitch's rating on JetBlue was just one notch below investment grade.

The Fitch analysts noted that while JetBlue has plenty of liquidity, it will exit the pandemic with an elevated debt load. As of June 30, the company had about $5.6 billion in debt and lease liabilities, up from $3.2 billion at the beginning of 2020. It has continued to add to its debt load over the past few months to buy more time for demand recovery.

Like their peers at J.P. Morgan, the Fitch analysts expect a slow recovery in demand, at least over the next few quarters. They also believe JetBlue won't be able to cut costs as much as some of its larger rivals, causing cash burn "to remain material well into 2021."

Demand may surprise the bears

While air travel demand will remain far below 2019 levels until vaccines are widely distributed, it has been improving steadily since August. In late September, JetBlue said that this "modest" improvement in demand from customers taking vacations or visiting friends and relatives would likely enable the carrier to reduce daily cash burn to the low end of its $7 million to $9 million guidance range in the third quarter.

Indeed, on Sunday, the TSA screened 984,234 passengers, the most for any day since March 16. This was still down 61% year over year, but the sequential uptick in demand for Columbus Day weekend -- typically a minor travel holiday compared to Memorial Day, July 4, and Labor Day -- points to substantial pent-up demand.

Of course, further increases in COVID-19 cases could sap demand over the next few months. However, with bigger travel holidays coming up, JetBlue could benefit from continued gains from leisure travelers and those visiting friends and relatives. Its strong position on routes from the Northeast to warm-weather markets like Florida and the Caribbean should also help JetBlue during the winter. It may not be enough to break even, but cash burn could slow significantly in the fourth quarter, outpacing Fitch's pessimistic outlook.

A JetBlue Airways plane preparing to land.

Image source: JetBlue Airways.

If Congress extends the airline payroll support program that expired at the end of September, breakeven free cash flow could even be within reach this quarter.

Debt reduction will resume by 2022

Fitch's concern about JetBlue's elevated debt load is understandable, but it isn't likely to be a long-term problem. With modest exposure to business travel and no long-haul international business, JetBlue should experience a faster demand recovery than its full-service peers. The timing of that recovery depends on when vaccines become available, but it's quite plausible that leisure travel demand will recover to near 2019 levels by 2022 (or even the second half of 2021).

Meanwhile, JetBlue has significantly reduced its capital spending commitments through 2022, with just $1.1 billion of committed aircraft spending next year and around $900 million for 2022. That paves the way for solidly positive free cash flow in 2022, all of which will be used for debt reduction.

The next few quarters will certainly be volatile, but JetBlue stock is extremely cheap compared to the company's long-term earnings power. That makes the stock an attractive choice for patient investors who are willing to tolerate some risk.