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Morningstar | We Maintain Our FVE as JetBlue Delivers Growth and Capacity Expansion

JetBlue Airways reported second-quarter results in line with our expectations. We are maintaining our no-moat rating and expect to maintain our $19 fair value estimate. JetBlue slightly beat consensus estimates for earnings per share and reported revenue in line with expectations. It reaffirmed it’s on track to meet its $2.50-$3.00 EPS target for fiscal 2020. Reported sales increased 9.2% year over year to $2.1 billion. Passenger and nonpassenger revenue grew 9.3% and 5.3%, respectively. JetBlue earned pretax income of $236 million for the quarter, up from a pretax loss of $162 million last year. Additionally, it reported 11.2% in pretax margin compared with negative 8.4% in the year-ago period.

For the quarter, capacity grew 5.9%, near the high end of management’s guidance range. This is further evidenced by JetBlue’s strong load factors of 86% in quarter. Management expects full-year capacity to grow between 5.5% and 6.5%. Revenue per available seat mile grew 3.1% in the quarter, slightly above the midpoint of management’s 1%-4% range. RASM benefited from a lift in booking trends in the quarter. JetBlue expects RASM to grow between 0.5% and 3.5% in the third quarter. Cost per available seat mile excluding fuel grew 1.8% year over year, slightly above the low end of management’s guidance range of 1.5%-3.5%. CASM excluding fuel was aided by JetBlue’s continued cost-cutting initiatives. JetBlue expects CASM ex-fuel to grow between 0.5% and 2.5%.

Alaska Air Group is our top choice of the two hybrid carriers because it holds a more defensible position in its West Coast and Pacific Northwest market, boasts an investment-grade balance sheet, and has a dividend yielding 2.3%. We anticipate margin accretion as Alaska pulls higher ancillary revenue from exit row sales, higher bag fees, and tighter change fee policies. Introducing its saver fare, a more generous basic economy, should also make the carrier more competitive versus bare-bones basic economy fares from legacy carriers. Amid strong but decelerating demand and restrained capacity additions during the early stages of our Stage I forecast period, we expect decent expansion in passenger revenue per available seat mile. In 2019 and 2020, we have PRASM inflating 3.5% and 1.5% in each respective year before flattening and turning negative in our 2023 midcycle year.