During 2013 and 2014, JetBlue Airways Corporation (NASDAQ:JBLU) was one of the airline industry's laggards in terms of financial performance. JetBlue missed its return on invested capital targets in both years. Moreover, it had one of the lowest profit margins in the industry in 2014.
However, JetBlue is in the midst of a strong comeback. Supply-demand balance is returning in JetBlue's main international markets in Latin America and the Caribbean. This is driving improved unit revenue trends. JetBlue is also benefiting from its high exposure to the domestic market (which is seeing better demand than most international markets) and the roll-out of its high-margin Mint premium service on transcontinental routes.
The result will be a surge in profitability this year. Analysts are currently expecting EPS to more than double in 2015, rising from $0.70 to $1.70 -- and even this may prove conservative. This will allow JetBlue stock to continue rising this year.
The tide is turning
Less than six months ago, JetBlue was receiving plenty of criticism from airline analysts as it reported uninspiring profit growth relative to the rest of the industry. In November, the company laid out a comprehensive plan to improve profitability over the next few years.
There were two key highlights. The first was an announcement that JetBlue would add a first bag fee for passengers using its cheapest tickets starting later in 2015. The second was an initiative to add 15 seats to each of JetBlue's A320s beginning in mid-2016.
However, much of JetBlue's underperformance is resolving itself before either of these programs have kicked in. Like Southwest Airlines (NYSE:LUV), JetBlue is benefiting from selling the vast majority of its tickets to U.S.-based travelers. By contrast, the strong dollar has hurt unit revenue at the big legacy carriers, which sell more tickets abroad.
But there's one big difference between Southwest and JetBlue. While JetBlue had a mediocre 2014, Southwest posted a stellar performance last year. As a result, JetBlue has more upside -- and its recent unit revenue results prove it.
Rapid unit revenue recovery
Unit revenue is a crucial metric of airline performance because it strips out changes in capacity to show how much revenue an airline is bringing in for each unit of capacity. Right now, unit revenue is falling at many U.S. airlines, as the strong dollar and low oil prices have created some pricing pressure.
Southwest Airlines has outperformed because of its focus on the domestic market, despite ramping up its capacity growth to 6% after not growing much in recent years. In January, Southwest's passenger revenue per available seat mile, or PRASM, fell about 1% year over year, but PRASM improved by 1% year over year in both February and March.
Meanwhile, JetBlue increased its PRASM by about 3% in both January and February. JetBlue attributed most of this unit revenue growth to the impact of weather-related flight cancellations -- but even 1% PRASM growth in the first two months of 2015 put JetBlue near the top of the airline industry.
However, it was in March that JetBlue really separated itself from Southwest and the rest of the pack. JetBlue's PRASM soared approximately 8% last month, bringing its year-over-year gain for the full quarter to roughly 4.5%. This will be by far the best unit revenue result in the industry.
Unit revenue growth means strong profitability
This strong unit revenue growth -- along with the significant recent drop in oil prices -- will drive the big profit gains analysts are expecting for 2015. After posting a meager 0.5% pre-tax margin in Q1 2014, JetBlue is likely to post a mid-teens pre-tax margin for Q1 2015.
Furthermore, if JetBlue's stellar March unit revenue performance is indicative of demand trends for the rest of the year, analysts may need to crank up their full-year earnings estimates yet again.
Adam Levine-Weinberg owns shares of JetBlue Airways. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.