Please ensure Javascript is enabled for purposes of website accessibility

Why Investors Shrugged Off JetBlue's Guidance Cut

By Adam Levine-Weinberg – Sep 13, 2021 at 7:22AM

Key Points

  • JetBlue modestly reduced its third-quarter revenue and EBITDA guidance last week.
  • Many investors were expecting an even bigger guidance cut, given that Southwest Airlines had issued a downbeat investor update nearly a month earlier.
  • JetBlue's relative outperformance in the third quarter suggests that its focus on the New York and Boston markets could be a competitive advantage over the next year or two.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The recent slowdown in air travel demand hasn't hurt JetBlue as much as some of its top rivals.

The summer surge in COVID-19 cases and hospitalizations driven by the Delta variant disrupted a nascent recovery in U.S. air travel demand. The situation has forced a slew of U.S. airlines to walk back their bullish third-quarter forecasts in recent weeks.

Last Thursday, JetBlue Airways (JBLU 0.63%) was one of several airlines to cut its Q3 forecast in conjunction with a presentation at an investor conference. However, investors didn't seem to mind. JetBlue stock actually rose 4% on Thursday, before giving back that gain on Friday. The stock is basically unchanged from where it sat after JetBlue gave its initial outlook for the quarter in late July.

JBLU Chart

JetBlue stock performance, data by YCharts.

Let's take a look at why JetBlue's guidance cut didn't seem to faze investors.

A modest revision

As of late July, JetBlue projected that its Q3 revenue would decline 4% to 9% relative to the third quarter of 2019 on a 0% to 3% decrease in capacity. Meanwhile, it expected adjusted nonfuel unit costs to increase 11% to 13% compared with 2019, mainly because of short-term headwinds such as maintenance spending deferred from earlier in the pandemic and costs related to ramping up capacity again.

Based on all of these factors, management estimated that JetBlue would generate between $75 million and $175 million of adjusted EBITDA in the third quarter.

Last week, JetBlue reported a modest downturn in bookings and an increase in cancellations associated with the latest wave of the pandemic. However, demand was very strong in July, partially offsetting the recent downturn. As a result, JetBlue now expects to report a 6% to 9% revenue decline compared with Q3 2019 on 1% less capacity. The carrier also reaffirmed its cost outlook.

A JetBlue Airways plane preparing to land.

Image source: JetBlue Airways.

Thus, JetBlue still expects revenue to fall within the range it provided in late July -- it will just be toward the lower end of that range. Similarly, JetBlue now projects that adjusted EBITDA will fall within the lower half of its initial guidance range this quarter -- i.e., between $75 million and $125 million.

A key rival made a bigger guidance cut

Investors shrugged off JetBlue's guidance revision probably because they were expecting worse. Last month, low-fare airline giant Southwest Airlines (LUV 1.53%) cut its August revenue guidance by 3 percentage points to a range of down 15% to 20% relative to 2019. It also issued a downbeat forecast for September, calling for revenue to be down 15% to 25% from September 2019. All this added up to a projection that Southwest's quarterly revenue would decline 15% to 20% compared with Q3 2019 on a similar level of capacity.

On Thursday, Southwest Airlines reduced its guidance again. Revenue ultimately declined about 19% in August and is on track to plunge 25% to 30% from 2019 levels in September. For the full quarter, the company now expects revenue to fall 18% to 20% from Q3 2019 on 2% less capacity. That implies a roughly 17% plunge in unit revenue.

In this context, JetBlue's updated guidance looks quite solid, as it implies a unit revenue decline of 8% at worst. While Southwest has kept its unit costs more under control, JetBlue is still on track to report a much smaller earnings decline than Southwest this quarter, compared with 2019.

Several Southwest Airlines planes in an airport gate area.

Image source: Southwest Airlines.

A good sign for the future

JetBlue noted in its investor update that it is seeing weak bookings for off-peak periods during the fourth quarter. The recent surge in COVID-19 cases has dramatically undermined fall business travel demand, while also affecting leisure travel. The airline will respond by trimming capacity and looking for additional near-term cost savings opportunities.

Looking further ahead, though, investors should be encouraged by JetBlue's third-quarter outlook. For much of 2020 and the first half of 2021, the airline's financial performance lagged most of its peers. JetBlue's heavy exposure to the hard-hit New York and Boston markets clearly weighed on its results.

By contrast, JetBlue's focus on the Northeast is now turning into a competitive advantage. Higher vaccination rates have kept the pandemic tamer in the New York and Boston areas than in most of the country this summer. JetBlue could also benefit from strong pent-up demand next year, given that many residents of the Northeast were relatively slow to return to the skies.

With JetBlue shares currently trading for less than 6 times the company's pre-pandemic 2020 earnings forecast, the stock has massive upside for investors willing to ride out some short-term volatility.

Adam Levine-Weinberg owns shares of JetBlue Airways. The Motley Fool recommends JetBlue Airways and Southwest Airlines. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

JetBlue Airways Stock Quote
JetBlue Airways
JBLU
$7.98 (0.63%) $0.05
Southwest Airlines Stock Quote
Southwest Airlines
LUV
$39.22 (1.53%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
360%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.