Description

Executive Summary

JetBlue Airways Corporation (JBLU) is an attractive short opportunity.  The Company is in an unsustainable position both competitively and financially, which should lead to its eventual restructuring.  Financial analysis indicates JBLU should be able to access the financing market to fund its near-term growth and meet upcoming debt maturities.  However, any financing the Company receives won’t address the Company’s underlying problem: it is a sub-scale industry participant whose margins are being steadily compressed by industry-wide trends.  Lack of FCF will prevent the Company from organically deleveraging, and at some point the capital markets will no longer issue the Company credit, resulting in a restructuring.  This will likely take years (2-4) to play out.

JBLU is also facing other challenges, including (i) continued difficulties with GTF engines, projected to result in an average of 11 aircraft being grounded during 2024, and (ii) difficult 1H24 comps given high pend-up travel demand which provided a tailwind to JBLU’s performance in 1H23.

As far as valuation, the equity in JBLU is arguably worth $0 right now given that JBLU’s Net Debt / EBITDA is 5.1x while higher quality network airlines (DAL, AAL, UAL and LUV) are trading at an average EV/EBITDA multiple of 5.0x.  The option value embedded in JBLU’s equity should decline as the Company layers on additional debt and the likelihood of a high dilutive equity raise or restructuring increases.

JBLU’s stock trades $80-100mm/day and is sufficiently liquid for most investors.  The Short Interest Ratio is 2.1x, indicative that this is not a crowded trade.

Company Description

JBLU is an airline which serves >100 destinations across the US, the Caribbean and Latin America, Canada and England.  The airline is predominantly a point-to-point system carrier with 93% of its routes touching at least one of its six focus cities: New York, Boston, Fort Lauderdale-Hollywood, Orlando, Los Angeles and San Juan, Puerto Rico.

As of 9/30/23 the Company had a fleet of ~296 planes, 241 of which are Airbus A320’s, A321’s or A220’s and 55 of which are Embraer E190’s.  Of the 296 planes, 231 are owned by JBLU and 65 are leased under operating leases.  None of the planes are leased under financing leases.  As of 9/30/23 the average age of JBLU’s fleet was 12.6 years.

The Company’s capacity by geographic group served is as follows:

• Transcontinental – 31%
• Caribbean & Latin America – 32%
• Florida – 25%
• East US – 5%
• Central US – 5%
• West US – 1%
• Transatlantic – 1%

JBLU has maintained for years that its “differentiated product and culture” which it delivers to customers through the “JetBlue Experience” as well as the Company’s competitive cost structure enables it to compete effectively against other carriers in the geographies it serves.

Airline Industry – Network vs. Non-Network

The US airline industry is dominated by the network carriers (DAL, AAL, UAL and LUV) which hold a combined market share of ~80% by Available Seat Miles, as shown in the analysis below.  The greater size and scale of the network carriers provides them with some pricing power and greater operating leverage.  This can be seen in the analysis below which displays the average TRASM less CASM-ex spread and EBITDA margins for the network carriers vs. the smaller, non-network carriers.

Please note that for the analysis above, all the Net Debt figures are based on strictly Debt less Cash and do not include pension liabilities, etc.  Also, the EV/EBITDA figures are based on consensus EBITDA estimates for each of the companies.

Unsustainable Position

JBLU is in a weak competitive position given its small market share (~5%) and lack of differentiation in its routes, preventing it from having any pricing power.  As shown in the analysis below, TRASM has grown at an anemic 1.0% CAGR over the past decade, well below inflation.  Further, the Company is succumbing to the pressure of industry-wide “cost convergence” where compensation for pilots, flight attendants, maintenance professionals, etc. are all approaching parity with one another between airlines.  Accordingly, any cost advantage certain carriers once enjoyed has now largely disappeared.  With a lack of pricing power and rising costs, JBLU’s financial performance has been deteriorating for the past decade as CASM-ex has grown at a faster rate than TRASM, leading to steady margin compression.  These trends can be seen clearly in the figures presented below.

To address its situation, JBLU’s strategy has been to increase the Company’s size in order to more effectively compete with the larger network airlines.  JBLU has been trying to increase its scale through (i) M&A and (ii) fleet expansion:

• M&A - JBLU tried to purchase SAVE to gain scale, emphasizing that the transformational acquisition would “turbocharge JBLU’s strategic plan”.  However, the transaction was blocked by a judge on 1/16/24 on antitrust concerns.  JBLU and SAVE are currently appealing the decision but the likelihood of a reversal appears low.  Importantly, during the DOJ’s investigation into JBLU’s purchase of SAVE, it was revealed that JBLU had tried to purchase ALK.  JBLU’s then CEO Robin Hayes testified that JBLU looked to merge with several other smaller airlines as it felt consolidation was necessary to compete with the larger carriers.
• Fleet Expansion – Prior to reporting 4Q23 earnings, JBLU had the following capex spending plan, the majority of which would be on new planes:
  • 2024 - $1.7bn
  • 2025 - $2.3bn
  • 2026 - $2.9bn
  • 2027 - $1.7bn

In reporting 4Q23 earnings JBLU announced it was deferring ~$2.5bn of the total projected capital expenditures from 2024-2027.  Management noted on the earnings call that the deferral was “imperative because the number one priority is getting this business back to sustained profitability.”  Management effectively acknowledged that JBLU doesn’t have the balance sheet to fund the growth the Company needs.  Management also indicated on the 4Q23 earnings call that they are planning on raising additional aircraft financing to support their capex spending.  JBLU’s new capex spending plan is as follows:

• 2024 - $1.6bn
• 2025 - $1.5bn
• 2026 - $1.6bn
• 2027 - $1.4bn

JBLU is now in a very challenging situation.  The Company can’t grow through M&A as airline consolidation appears “off the table”.  Further, the Company doesn’t have the balance sheet to sufficiently expand its fleet and capture the necessary operating leverage to be on a path toward margin expansion.

Financial Analysis

The financial analysis presented below reflects management’s guidance for 2024:

• ASMs y/y:                            Down low single digits
• Revenues y/y:                   ~Flat
• CASM ex y/y:                     Up mid-to-high single digits
• Adjusted EBIT:                   Approaching breakeven
• Capex:                                  $1.6bn

The analysis then incorporates the following projections for 2025 and 2026:

• ASM growth of 7% given the Company is taking delivery of ~24 planes per year, representing ~8% fleet growth.  Some of these planes are to be used to retire Embraer E190’s which JBLU is steadily phasing out.  The 7% ASM growth assumes as few as possible E190’s are phased out and is likely a “high” number.  It is purposely aggressive, and thus beneficial to the Company, for the sake of this analysis.
• TRASM growth of 1%, in-line with historical trends.
• CASM-ex growth of 0%.  This is well below JBLU’s historical trend of 3.2% annual growth, and thus beneficial to the Company for the sake of this analysis.
• Fuel - $3.00/gal, within the range of JBLU’s 1Q24 guidance

The analysis then lays out the FCF and Balance Sheet profile for the Company based on its EBITDA generation, interest expense and income, and planned capital expenditures.  The analysis incorporated the following in the projections:

• Capital expenditures of $1.6bn, $1.5bn and $1.6bn in 2024, 2025 and 2026, respectively
• JBLU finances these capital expenditures through 1L Equipment Notes (secured by the planes), similar to the ones currently on the Company’s balance sheet.  The analysis assumes JBLU receives an LTV of 70% on the 1L Equipment Notes and an interest rate of 5.7%, in-line with where JBLU’s existing notes are currently trading.

As can be seen in the analysis, even though JBLU is growing its fleet, its balance sheet is not deleveraging.  Projected leverage would be >8.0x.  Assuming JBLU’s financial performance is reasonably close to that presented above, at some point likely in the next 3 years, the capital markets will start to lose confidence in JBLU’s creditworthiness and hold back from providing the Company with financing.  A restructuring would likely result shortly thereafter.

Importantly, the above analysis assumes that “everything runs relatively smoothly” for JBLU but the risks are large that this will not be the case.  During this period from 2024-2027, the Company could encounter any of the following:

• Economic recession, driving down travel demand and increasing price competition
• Acts of terrorism which would drive down travel demand
• Extreme weather events
• Supply chain risks
• Labor disruptions (pilots, flight attendants, maintenance, etc.)

JBLU emphasized on the 4Q23 earnings call that the Company has an unencumbered asset base of >$10bn (loyalty program, JetBlue brand, airplanes and slot portfolio) through which they can access additional financing.  That might be true and could provide additional liquidity to the Company, but it doesn’t address JBLU’s underlying problem:  it’s a sub-scale industry participant whose margins are being steadily compressed by industry-wide trends.  Even if JBLU doubles its fleet size (massive airplane capex, purchasing planes at auction from SAVE if it enters bankruptcy, etc.), it’s market share would only increase to 10% and it will still be much smaller than the network carriers.

Catalysts

• Investor Day – JBLU is hosting an Investor Day sometime in May at which management said they will lay out the Company’s multi-year growth rate projections.  Thes projections could be below current consensus estimates.
• Financing - During JBLU’s 4Q23 earnings call, management noted that they plan to raise additional aircraft financing in 2024 to support the Company’s capex spending needs.  The Company will then have to raise additional financing to support its capex spending needs both in 2025 and in 2026.  Further, the Company will have to refinance its $750mm 0.5% convertible which matures on 04/01/26.  Each time the Company approaches the capital markets will be a test as to whether JBLU can actually access financing.  Any issues/troubles along the way will likely cause the stock to decline materially as the probability of a bankruptcy filing increases.
• Economic recession, driving down travel demand and increasing price competition
• Acts of terrorism which would drive down travel demand
• Extreme weather events
• Supply chain risks
• Labor disruptions (pilots, flight attendants, maintenance, etc.)

Catalyst

Catalysts

• Investor Day – JBLU is hosting an Investor Day sometime in May at which management said they will lay out the Company’s multi-year growth rate projections.  Thes projections could be below current consensus estimates.
• Financing - During JBLU’s 4Q23 earnings call, management noted that they plan to raise additional aircraft financing in 2024 to support the Company’s capex spending needs.  The Company will then have to raise additional financing to support its capex spending needs both in 2025 and in 2026.  Further, the Company will have to refinance its $750mm 0.5% convertible which matures on 04/01/26.  Each time the Company approaches the capital markets will be a test as to whether JBLU can actually access financing.  Any issues/troubles along the way will likely cause the stock to decline materially as the probability of a bankruptcy filing increases.
• Economic recession, driving down travel demand and increasing price competition
• Acts of terrorism which would drive down travel demand
• Extreme weather events
• Supply chain risks
• Labor disruptions (pilots, flight attendants, maintenance, etc.)