It's been a surprisingly decent year for airlines, and by extension, for airline stocks. After a few ups and downs, the NYSA ARCA Airline Index is sitting more than 20% above 2022's close, and still climbing.
Credit most of the recent bullishness to record-breaking air passenger traffic this year on the Sunday following Thanksgiving -- the busiest air travel day linked to the holiday. The American Automobile Association further predicts record-breaking air travel again in late December and early January. The International Air Transport Association (IATI) sees more growth in 2024 as well.
Yet, not every airline stock is soaring. JetBlue Airways (JBLU 1.05%) remains in the red for the year, unable to take flight the way most of its peers have. What gives? Is it because of problems unique to JetBlue or is the market overlooking an opportunity?
Clear skies ahead?
If the whole post-pandemic "revenge travel" thing has run its course, somebody forgot to tell people. Not only are they traveling in droves within the United States, but the skies in China, India, and other major markets are increasingly crowded with jets full of paying passengers.
They're going to remain that way for a while, too, if the IATI's expectations are on target. The association believes the industry will handle 4.7 billion individual trips in 2024, breaking pre-pandemic 2019's record of 4.5 billion. That demand should drive $964 billion worth of revenue, up 7.6% from this year's top line despite falling ticket prices. Overall airline profits will likely grow in 2024 as well.
JetBlue Airways is capitalizing on this tailwind. Last week, it (mostly) raised its fourth-quarter and full-year capacity expectations. At the same time, it raised its revenue guidance, explaining: "Since late October, close-in bookings have outperformed expectations for both holiday peak and non-holiday travel periods." (Close-in reservations are bookings made closer to the travel date as opposed to well before it; these tickets tend to cost more than those purchased further in advance.)
JetBlue shares jumped following the news, extending a budding rebound effort. Still, investors will want to tread carefully as the company is currently unprofitable, and will likely remain so through the coming year.
But size matters in the airline industry
Don't misread the message. Stocks of unprofitable companies can and do make gains, particularly if there's promise of profits in the foreseeable future. And for the record, JetBlue Airways has been more profitable than not over the course of the past couple of decades.
The current condition of the air travel industry isn't quite as solid as it may seem on the surface, however. It's a tough operating environment, with inflation seemingly taking an oversized toll on certain airlines.
Yes, the IATI believes 2024 will be a banner year for the business. The association's outlook comes with a couple of important footnotes, though. Chief among them is that while next year's total sales will likely be record-breaking, net profit margins will also likely be unbelievably thin. On a worldwide basis, the IATI only expects $25.7 billion worth of total profit to be produced on 2024's projected $964 billion in revenue. That's a net profit margin of only 2.7%.
Granted, the air travel business has never been a particularly high-margin one. Its net margin ranged between 3% and 5% prior to the pandemic. With such narrow profit margins being the norm for the industry, however, relatively smaller airlines like JetBlue suffer more than most simply because they lack the scale to weather such a storm. Again, JetBlue's losses this year are expected to be repeated in 2024.
Too much risk, not enough upside
JetBlue should eventually swing back to a profit again -- there's little doubt about that. The analyst community believes the company will fight its way back into the black in 2025, once a bit more economic normalcy takes shape again. Savvy investors, of course, know the right time to jump into such a recovery is before it's obviously underway.
This is also a situation, however, where investors may not want to be too quick to act. They should instead keep their finger on the pulse of a company, the economic backdrop that company operates within, and the market's mood regarding the underlying stock. Consumer demand for air travel has remained surprisingly resilient, but not all airlines are built the same.
Regulatory oversight can work for or against an airline in unexpected ways as well. For instance, earlier this year JetBlue was barred from forming a regional partnership with American Airlines in the northeastern United States, while its plans to acquire Spirit Airlines are facing legal hurdles as well.
These pairings would arguably offer JetBlue the scale it needs to cost-effectively compete with bigger competitors. If they're not allowed to take shape, there's no assurance the airline will be able to fight its way back to profitability as expected in 2025.
Bottom line? Take your shot on JetBlue if you must. Comparing the above-average degree of risk here to the below-average degree of potential reward, however, it's not an especially compelling bet right now.
Maybe this will help put things in perspective: Despite the recent wave of bullish news, the analyst community's consensus price target for JetBlue Airways shares still stands at $4.65. That's 13% below the stock's current value.
