It seems that in the airline business, the extremes get rewarded, while the middle is a no-man's land. Ultra-low-cost carriers lead the industry in margins, though premium experience airlines, like JetBlue (JBLU 1.08%), are at the head of the pack in both customer satisfaction and stock performance. The company reported fiscal first-quarter earnings last week, and while the numbers largely came in lower than the year-ago figures, there was still plenty for investors to rally behind.
Management predicts margin expansion and all around better times ahead as the company's route system matures and unit-level metrics grow at the same time as capacity -- a somewhat rarity in the airline world. Here's how JetBlue continues to rule the skies.
Smooth sailing
Both operating and net income were fractions of their year-ago numbers, but JetBlue management was nonetheless excited to report the company's profitable fiscal first quarter, completing a four-year streak of landing in the black.
A closer look at the numbers reveal a pretty impressive three-month period. JetBlue hauled in $1.3 billion in sales -- a record figure for the first quarter -- despite 4,100 canceled flights during the quarter. The company estimates the foul weather accounted for $50 million in lost revenue and $35 million in operating income. Add back in the latter to the quarter's $41 million, and JetBlue would have posted a year-over-year gain of nearly 29%.
JetBlue saw its key unit level profitability metric grow 0.9%, while also growing capacity. Typically, airlines take a hit on passenger revenue per available seat mile (PRASM) when expanding into new routes and airports. Few can maintain positive traction with both simultaneously (Alaska Air Group is another example), which shows the strength of JetBlue's competitive position. Travelers want to see the airline coming into their nearest airport and will pay up.
Long-haul winner
One great thing about JetBlue, beyond its in-flight entertainment offerings, is management's dedication to long-term growth. The company maintains its goal to increase its ROIC by one percentage point each year. While it may not sound like a ton, it bucks the trend of most traditional carriers.
Investors should keep an eye on the PRASM growth, as this unit level metric is incredibly important and indicative of long-term profit growth. As long as the company is expanding its business while also earning more per passenger mile, there's little chance things will go anywhere but up. One can compare this to same-store sales growth and new-store expansion. The latter is preferable, as long as the return on that growth attractively exceeds its cost.
A potentially negative development to watch is rising employee costs. Last week, JetBlue CEO showed little optimism for the company's decision to allow its pilots to unionize. JetBlue pilots voted yes to join the Air Line Pilots Association by a margin of 71% [http://www.bloomberg.com/news/2014-04-22/jetblue-pilot-vote-ends-run-as-biggest-nonunion-airline.html], leaving the company little choice but to end its status as one of the last carriers to holdout from the unions.
Will it cost the company more, now that it must negotiate with labor leaders on a consistent basis? Probably. JetBlue has more than 2,000 pilots, and the conversations with the union could take three years of collective bargaining. Ultimately, though, this could be viewed as a long-term benefit to the business. Employee satisfaction is incredibly important, especially if those employees are flying millions of people around the country on a day-to-day basis. With such a resounding decision to unionize, JetBlue pilots clearly wanted more from the company than they were receiving under direct negotiations.
Just because the pilots are unionized doesn't mean that the company can't continue its impressive run. Aforementioned Alaska Air has an agreement with the ALPA, as well [http://www.alaskaair.com/content/about-us/newsroom/as-employees.aspx], and the airline is one of the best-performing stocks in the transportation sector.
The airline business is a brutal one, but JetBlue has made it work. Fuel costs can fluctuate quarter to quarter and affect earnings, but the big thing to focus on here is competitive position of the airline. JetBlue is one of just two or three airlines that consistently generate positive reviews. An airline can weather bad reviews if it's a notoriously cheap carrier, such as Spirit Airlines, because the no-frills ride yields great margins.
For a mainstream airline like JetBlue, though, customer satisfaction is crucial. People actually want to fly on JetBlue, and many will pay a few bucks more to do it. As the company steadily grows its capacity via routes and fleet additions, expect financials to follow suit.
