Investors Should Cool Their Jets on JetBlue

JBLU stock is in a precarious position as we await its third-quarter results

The Northeastern side of the US features the early epicenters of the novel coronavirus. Unfortunately for low-cost airline JetBlue (NASDAQ:JBLU), it derives most of its demand from that region. On top of that, financial support under the CARES Act is set to expire this month. Therefore, JBLU stock is in a precarious position as we await its third-quarter results.

Travel demand has improved modestly in the summer despite it being the hottest time of the year. Moreover, the recent uptick in coronavirus cases has also slowed down demand considerably. Airline carriers, including JetBlue, expect demand to remain choppy and are imploring the government for extended support. Hence, the company is in for a testing time, at least in the near term.

Recapping the Second Quarter

Like for the rest of the industry, the second quarter was expectedly rough for JetBlue. The company posted a wider-than-expected loss of $2.02 per share compared to analyst estimates of a loss of $1.86. Naturally, due to the weakened demand, revenues plunged almost 90% year-over-year. The bulk of the decline was attributable to passenger revenues. Additionally, revenue per available seat reduced by roughly 32.2% to 8.9 cents year-over-year.

Perhaps the most promising aspect of JetBlue’s financials was its balance sheet position. It exited the quarter with an impressive $3.4 billion in liquidity. The improvements were primarily because of the measures taken by the management in lowering cash burn and debt. The management reduced its average daily cash burn to $9.5 million from $18 million per day in March.

However, if you take out the $0.5 billion payroll aid under the CARES Act, the company is left with $2.9 billion. The third quarter doesn’t look pretty either, with revenues expected to tumble by 80% year-over-year.

This is perhaps why Chief Executive Officer Robin Hayes has called for the government to extend support under the CARES Act beyond September. He talked about carriers would have to cut tens of thousands of jobs with only 25% to 30% demand. JetBlue plans on reducing its flight schedule due to the resurgence in Covid 19 cases and quarantine restrictions in certain states. Hence, it will only fly 40% of its schedule in August.

Transatlantic Expansion

Covid 19 has put expansion plans on the back-burner for several airline companies. Nevertheless, JetBlue’s plans for its transatlantic expansion remain unchanged, and it’s confident in launching its London Route next year. The route is essentially a stepping stone for deeper inroads into the European market.

At first glance, you would probably think that such an ambitious move is ill-judged at this time. Robert Mann, an aviation consultant, felt that the company should delay its London route for at least two years. Though his assessment is plausible, I feel that entry into the European market couldn’t be more opportune at this time.

Last year in April, CEO Robin Hayes talked about the importance of slots in Jetblue’s European entry. “New entrants need slots. We’ll bring the airplanes, and we’ll bring the low fares, we’ll bring the service. We’ll bring everything else. The thing we can’t bring is the slots. But make those slots available to new entrants like JetBlue, and you will see a profound and dramatic effect with lower fares in the market,” Hayes stated.

The recent schedule cutbacks due to the pandemic will help the company to obtain better slots in the London market. It felt like a distant dream for Jetblue in getting slots at Heathrow or Gatwick airport.  Additionally, the company has a relatively strong liquidity position gives it an edge over its rivals. Companies with weaker financial positions might not be able to mount an aggressive competitive response.

With that being said, there’s no guarantee that the company’s plans will come to fruition. The regulatory process is perhaps its biggest hiccup, which would potentially slow down due to the pandemic.

Final Word on JBLU Stock

It’s going to take a lot for JetBlue to turn the tide. Demand has nosedived and will probably slow down even more in the post-summer period. The CARES Act will expire soon, which will intensify pressures on its financial flexibility. Its transatlantic expansion plans are not set in stone, and the company is likely to encounter regulatory problems along the way. Hence, it’s best to avoid JBLU stock at this time.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article