Three years ago, JetBlue Airways (JBLU +6.44%) announced plans to replace its 60 Embraer E190s on a one-for-one basis with Airbus (EADSY +5.19%) A220-300s. (It exercised options for 10 additional A220s in 2019.) JetBlue estimated that the new A220s would have 29% lower operating costs per seat than its E190s.
Airbus delivered JetBlue's first A220 at the very end of 2020, and that aircraft entered service in late April. As the airline's A220 fleet increases in the coming years, it will unlock huge earnings growth opportunities.
More than just a fleet modernization program
The A220 is compelling as a direct replacement for JetBlue's E190s. The carrier is configuring its A220-300s with 140 seats, compared to 100 for its E190s. Despite this big discrepancy in seating capacity, the two models cost similar amounts to operate on a per-trip basis, thanks to the A220's low maintenance costs and dramatically superior fuel efficiency.
At the time of the order, JetBlue said it expected each A220 to generate $4 million to $5 million of incremental annual profit compared to the E190s they would replace. That would boost JetBlue's overall pre-tax margin by about 3 percentage points and increase earnings per share by $0.65 by the time the fleet transition wraps up in 2025.
A rendering of a JetBlue A220-300. Image source: Airbus.
However, the A220 can do a lot more than fly short-haul routes (the E190 fleet's bread and butter). It has enough range to operate transcontinental routes and even some trans-Atlantic routes.
This means that JetBlue can use the A220s more than its E190s -- for example, by operating transcontinental flights during the overnight hours when they would otherwise sit idle. Additionally, a few years down the road, the A220 could replace some of JetBlue's aging Airbus A320s.
The A220 will unlock new growth opportunities
In recent years, transcontinental flights have become an increasingly important part of JetBlue's business. The carrier has rolled out its upscale Mint service in numerous wealthy, high-demand markets like New York-Los Angeles. Meanwhile, it has used its A320 fleet to serve a handful of smaller transcontinental markets, like Buffalo-Los Angeles and New York-Ontario, California.
These niche markets have grown in importance lately. Last September, JetBlue announced new routes connecting Los Angeles to Charleston, South Carolina; Richmond, Virginia; and West Palm Beach, Florida -- markets that previously lacked nonstop flights to L.A. Two weeks later, it announced new routes from Hartford, Connecticut, to Las Vegas, Los Angeles, and San Francisco. And just last week, JetBlue began flying from New York to Kalispell, Montana, and Boise, Idaho.
Yet these routes haven't all been successful. Last month, JetBlue downgraded the Richmond-Los Angeles route to seasonal status. It has also exited or suspended several other transcontinental routes.
Shifting service to the A220 could turn many loss-making or marginally profitable transcontinental routes into strong performers. In addition to having somewhat lower unit costs than JetBlue's A320s, the A220-300 will generate much stronger unit revenue on "long and thin" routes (long-distance routes that don't have enough traffic to warrant a wide-body aircraft). After all, JetBlue's A320s have 22 additional seats compared to its A220s. In smaller markets, it would typically have to sell those seats at very low fares -- if it could fill them at all.
A JetBlue Airbus A320. Image source: JetBlue Airways.
Investors should be patient
The Airbus A220 won't have a meaningful impact on JetBlue's profitability this year or in 2022. The low-fare airline has just three A220s today. It expects to have eight by year-end, with another nine set to arrive in 2022. With such a small fleet of A220-300s, crew training and other transition costs will outweigh the benefit of the model's excellent economics in the near term.
But JetBlue expects to receive another 18 A220s in 2023 and 22 in 2024. That will unlock the savings the carrier touted when it placed its initial order in 2018. It will also give it a big enough A220 fleet to start testing the new jet on a variety of long-and-thin routes.
Thanks to the A220's combination of long range, low trip costs, and low unit costs, JetBlue is likely to find many new growth opportunities that wouldn't be viable otherwise. That could encourage it to order more A220s in the years ahead.
And half of its fleet of 130 A320s will be at least 20 years old by 2025. The carrier will probably replace some of those planes with 200-seat A321neos. In other cases, replacing A320s with the slightly smaller A220 will maximize JetBlue's margins by helping the carrier to better match capacity to demand while keeping unit costs low.
By enabling new growth opportunities while replacing E190s (and eventually A320s) in a highly accretive manner, the Airbus A220 will likely have a transformative impact on JetBlue's earnings. It could take a decade or more to capture the full upside, though, so investors should be patient.
