JetBlue Airways Corporation

Moat: 1/5

Understandability: 1/5

Balance Sheet Health: 2/5

JetBlue Airways Corporation is a low-cost carrier airline operating in the United States, the Caribbean, Latin America, Canada, and Europe. JetBlue aims to provide high-quality service with affordable prices and is known for its customer-centric approach.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

JetBlue operates primarily as a passenger airline, offering scheduled service across the United States, the Caribbean, Latin America, Canada, and Europe. The company’s revenue streams are diversified, encompassing passenger revenue, baggage fees, change fees, cargo revenue, and other ancillary offerings. JetBlue differentiates itself through brand recognition and customer experience. The airline industry is incredibly competitive, with no clear pricing power with limited pricing advantages and the threat of new entrants always around the corner.

Revenue Distribution and Trends:

  • Passenger Revenue: The bulk of JetBlue’s revenue is from passenger ticket sales. This stream is influenced by factors such as demand, seasonality, and route network.
  • Ancillary Revenue: JetBlue also generates revenue from ancillary services, including baggage fees, change fees, early boarding, and other bundled options. These are influenced by the overall passenger demand for these services.

In recent years, the industry has seen a trend of “premiumization,” where passengers are willing to pay more for value-added services such as preferred seating, extra legroom, and bundled travel packages. This trend benefits airlines that have developed robust ancillary revenue streams, as well as a focus on quality and customer experience, but at the end of the day, the airlines are selling a commodity where price can be the deciding factor. The major problem is that most customers are more willing to pay for first-class seating, leg room and other facilities but all of them still expect low prices.

Competitive Landscape:

  • Major Network Airlines: The “Big 4” airlines, which include American, Delta, United and Southwest, are the primary competitors in almost all routes, especially main hubs, because their business model requires hubs to be more effective. These airlines often have higher operating costs but are also able to generate high revenue due to stronger customer loyalty, more routes, and overall larger size and scale.
  • Low-Cost Carriers: Other low-cost carriers such as Spirit and Frontier are also competitors, offering lower fares than traditional airlines. However, they often have weaker brands, inferior customer experience, and a bare-bones service offering. This makes them attract different customer segment than JetBlue.
  • Regional Airlines: JetBlue also faces competition from regional airlines, which generally serve smaller cities and regional airports. These companies are often in niche routes and have a higher dependency on their own local market.
  • International Airlines: When flying in international routes, JetBlue faces competition from local incumbents, including Air Canada, British Airways, and Aeromexico.

What Makes JetBlue Different? JetBlue differentiates itself from its peers with a strong focus on brand, customer experience, and a hybrid model. Unlike low-cost airlines that go to “the bottom” to give the lowest prices possible, JetBlue focuses on giving some value-added services and aims to create strong customer loyalty in the process. For example, JetBlue offers free Wi-Fi on all flights, and free live TV in many flights, as well as a relatively large legroom for its price range.

Financials:

Recent Performance:

  • JetBlue has struggled financially in recent years, recording large losses due to a combination of high fuel prices, operational inefficiencies, and network challenges. This is evident in the 10-Q, where they recorded losses of (153.7) million in 3 months ended September 30, 2023, and a total of (704.1) million in 9 months ended September 30, 2023.
  • The company is actively working to restore its profitability by focusing on lowering costs and increasing revenue, but the results remain to be seen.
  • 2022 was not a good year, as seen in the 10k where they had a net loss of -362.7 million, and also negative operating income in all quarters.

Reorganized Financial Statements: The company’s financial statements, are reported in line with GAAP accounting standards. It should be noted that some non-GAAP financial measures are used, which include adjustments made by management to improve comparability. In this book, we have shown how you can see a company’s “true earning power” by looking into the actual cash flows of operations and all other costs.

  • Revenue Growth: JetBlue’s revenue has fluctuated between $1.47 Billion and $2.51 Billion in the last 3 years, with 2022 being a high revenue year, due to the strong recovery post-covid. Revenue growth is expected to be moderate in the near future, given the slowing growth in the airline industry.
  • Profitability: JetBlue’s profitability is very weak. This year, it is not even profitable at the operating income level. Net loss in the last three quarters and poor performance metrics indicate an underlying problem in the business that needs to be fixed.
  • Return on Capital: The company’s return on capital is low, suggesting that JetBlue has been struggling to generate profitable opportunities for its business with excess invested capital.
  • Liquidity: JetBlue’s liquidity is fairly weak. Cash and cash equivalents have decreased to $792 million in Sep 30 2023, from $2.1 billion at the start of the year. With such a high burn, unless the company gets new sources of funding, it will need to make serious cutbacks to its operations. This would hurt any sort of competitive edge.
  • Debt and Capital: The company has taken an aggressive approach to financing its capital needs. This has led to increased indebtedness, with total debt (including lease obligations) standing at $11.9B at the end of Sep 30, 2023. This level of debt might hurt its ability to compete in the airline industry, making it a very risky proposition.

Economic Moat Analysis: Based on our analysis, JetBlue does not currently possess a durable moat. Here’s a breakdown of the reasons:

  • Intangible Assets: JetBlue has a recognizable brand name. Although, in the airline industry, the brand of a low-cost carrier is not as valuable as a more premium brand. The company does not have patents, or regulatory licences that give it a competitive advantage.
  • Switching Costs: There are virtually no switching costs for JetBlue’s customers. This is especially true in the current environment where a ton of other carriers provide similar or identical routes.
  • Network Effects: While JetBlue’s routes and schedules may provide some network effect, their network does not meet the requirements to qualify as a network effect business.
  • Cost Advantages: Although JetBlue is a low-cost carrier, it does not consistently produce a durable cost advantage over all of its competitors. The company faces many issues in managing costs, and is susceptible to price pressure coming from larger and more efficient carriers.

Moat Rating: 1 / 5 Based on the above analysis, JetBlue has a weak to nonexistent competitive advantage, so its moat is given the lowest rating possible. The lack of tangible cost advantage is hurting the company because the airline industry is essentially a commodity industry.

Risks to the Moat and Business Resilience: JetBlue faces several challenges that could hinder its profitability and competitive position in the future:

  • Economic Downturns: As airlines face volatile demand, JetBlue is vulnerable to any recession or change in economic performance that could significantly reduce consumer demand.
  • Fuel Price Volatility: Fuel is a very significant expense for airlines, thus any increase can dramatically affect the cost structure of the company.
  • Intense Competition: Given the lack of clear competitive advantages, JetBlue faces intense competition from other airlines, which may result in lower fares and reduced market share.
  • Labor Costs: Labor costs are significant for all airlines. Rising labor costs could negatively impact the company’s profitability.
  • Operational Failures: JetBlue is currently struggling with operational inefficiencies and network issues, which are contributing to poor performance. If they fail to fix their operations in a timely manner, this will be a disaster for the company.
  • Debt and Leverage: The company carries significant debt, and faces potential bankruptcy if they can’t find a way to fix their operations.

Recent Problems:

  • JetBlue faced a very bad operational failure in the first half of 2022, having to reduce routes, and cancel flights. This damaged its brand perception.
  • JetBlue’s merger plans with Spirit are currently facing regulatory hurdles, and may not receive approval.
  • They are losing a considerable amount of money and their future path is uncertain.

Business Understandability: 1 / 5

JetBlue’s business model is very simple to understand for the most part. However, the airline industry as a whole is very complicated. The company’s overall finances and operations are understandable and a good analysis is possible, but as this book has shown, it’s really hard to create any sort of moat, because most of its revenues and cost structure are dependent on market conditions. Furthermore, there are plenty of unpredictable conditions affecting the airline industry that no company can predict, such as war or political tensions, terrorist events, etc. This is the one of the reasons we rated it at 1, and not 2. Overall, it’s simple for any investor to quickly grasp its business.

Balance Sheet Health: 2 / 5

  • JetBlue’s current cash position is low and decreasing.
  • Total debt to equity is alarmingly high, which makes it harder for the company to compete.
  • Net profit has seen a steep decline.
  • Overall, the balance sheet does not look very good for JetBlue, and needs a lot of improvement if it wants to compete in the long run.
  • Unless the company finds a stable way to increase profitability, its debt position would become unbearable, thus the high chance of bankruptcy.