I think the airlines in general are mispriced. They used to loose a lot of money over the years. However, they consolidated via mergers, cut costs, nickeled and dimed on extras and learnt how to make money at $100 oil. With exceptions like SAVE, they have low PEs. JBLU got a bad rap due to the Saint Valentine Day fasco.
I figure based on the oil price chart, 25% hedged fuel, that the cost of jet fuel dropped by 20% from Q3 to Q4/2014. Or $100M of the 515M jet fuel cost in Q3. With nearly 300M shares, that is $0.33/s pre tax, or around $0.25/s after tax approximately. With old analyst estimates unchanged at 0.26/s base on higher fuel prices, we could get blowout earnings on Jan-29. I have not seen ticket price erosions during the holidays. 20% of available float is short. So we could see a huge short squeeze. Airlines start reporting on Jan-20. So we will get an idea of what is going on.
I think oil prices will stay weak for a while like starting in 1985.
I agree with yor analysis. With the exception of aal, rest of airlines have unde water hedges or forward contracts. At least 30% of revenue goes to pay for jet fuel in 2014Q3 for most eairlines, especially regional airlines.
Crude oil dropped from $90 to 55/B in Q4. Average at $72.50/B. Q3 average was $95/B. That is a 25% reduction in fuel cost or more given the holiday spike in travel. I would say the average is closer to 30% reduction in fuel. Nearly double sequential profits. I think most of airline stocks do not reflect this. Some have short interest
I am long UAL and JBLU. They have been lagging. UAL has skinny margins. JBLU is a gas hog with hi short interest. Even 20% drop in jet fuel due to hedges in place double their earnings sequentially. Analysts got their Q4 earning estimates lackluster. Hi risk bet. Looking back. LUV would have been a better choice. I just do not add airlines.
JBLU metrics are actually quite good. Nov-2014 volume increased 10% compared to year ago. Fares stayed about the same. LUV is simply a well run point to point regional airline.
I think that JBLU should have stuck with the 1st free bag policy. Implemented thin back cushion seats, kept same leg room, reduced weight. Added more seats. These are short haul flights, not sure about use of Mint. Operations need to be simple. Just like LUV.
Anyway, jet fuel is dirt cheap. In my humble opinion, 4Q2014 EPS should 25 cents just from fuel savings compared to prev Q. Only 25% of fuel was hedged. Analysts are negative on the stock. Huge short interest at 20% plus. We could see a short squeeze
JBLU has been paying off debt and that makes sense instead of dividends. Want dividends? Buy Exxon, Chevron, etc. Ma be invest in the 320neo or 321 321neo with compact light seats, but same pitch.
20% of the float is short on JBLU as of 12-15-2014.. I think is the highest among the airlines. After today I expect the short interest to go up. Should the airline blowout earnings, we may see a huge short squeeze. Given the low daily volumes, the shorts will have a hard time covering 22m shares.
Analysts are bunch of morons. Airlines analysts are usually the rookie runts since the it is a discredited investment thanks to Warren Buffet. Most of the PEs are dirt low. JBLU has low debt/equity (1) compared to most airlines including LUV. Net profit margins at 6% and return on equity is 16%.
Since it is a regional airline flying mid size A320/1 it burnt a lot of fuel at 36% of total expenses. Meanwhile, jet fuel prices have fallen steeply from 3.25/gal to less than $2/gal. A lot of it was hedged and those hedges are coming off. Meanwhile, ticket prices have been stable across the industry.
Estimates for airlines have barely budged since the steep drop in the price of crude and jet fuel. Less than 25% should be hedged by now. Even if JBLU management are a bunch of dummies, they should be making a ton of money off the fuel savings. I am thinking that last 2014Q4, JBLU made something in the range of 40-50 cents/share. December was a busy month, but jet fuel prices fell precipitously.
Unless my math is totally messed up, JBLU could blow estimates for the 2014Q4. Instead of 26/s, they could do close to 50 cents/share. Fuel prices keep on falling. This expectation could cause estimates to be revised up significantly. The stock has nearly 20% of the float short, more than any other major airline here in the US.
What I find strange is that the analysts have not upgraded the airlines across the board. They all got similar fuel economics. Sounds too good to be true. I must be missing something. Ticket price war? Error in estimating on my parts.
Any bean counters in the board that could help?
Fuel Expense and Hedging
JetBlue continued to hedge fuel to manage price volatility. Specifically, in the third quarter JetBlue had in place hedges for approximately 23% of its fuel consumption and managed approximately 7% of its fuel consumption using fixed forward price agreements (FFPs). This resulted in a realized fuel price of $3.05 per gallon, a 2.7% decrease over third quarter 2013 realized fuel price of $3.14. JetBlue recorded $1 million in losses on fuel hedges that settled during the third quarter.
JetBlue has managed approximately 34% of its fourth quarter projected fuel requirements using a combination of FFPs, jet fuel swaps and caps. Based on the fuel curve as of October 16th, JetBlue expects an average price per gallon of fuel, including the impact of hedges, FFPs and fuel taxes, of $2.80 in the fourth quarter.
According to the IATA web sites and others, the price of jet fuel has fallen steeply probably below $2/gal. Even a 50 cent drop would result is 75M fuel saving or 25 cents/Q.
Most analysts are clueless. Have you met any? Most are 24-28 runts with all sorts of liberal arts. The good ones do not focus of airlines, they are chasing Ali Baba, or FB. Barely any coverage on JBLU. The company is a little conservative but has low debt. They will become efficient over time. Their focus has been on the consumer.
I suggest anybody investing on JBLU look at their website financials and reports. Give a lot of info.
I think the market is way underestimating the profits of airlines and in particular JBLU that has a short interest of 20%. This is huge given the limited liquidity of the stock. Hard to cover.
Meanwhile, look at the fuel situation. JBLU spent 36% of expenses on fuel amounting to 515M in 2014Q4. In terms of % barely changed from same Q in 2013. Due to hedging fuel costs stayed nearly the same from little over and under $3/gal. Now the hedges will be coming off as time goes by. Jet fuel is below $2/gal net of taxes and is coming down to catch up with crude drop. Personally, I think crude oil will hit $40/B at least. So $1.50/gal for jet fuel is possible. It would amount to nearly $1B annual savings of fuel. After tax it could be $600M, though the airline tax rates are much lower. That amounts to $2/share over the last quarter run rate of may be $1/year EPS. I think oil prices will stay low for a long time.
Meanwhile, JBLU wants to pack 15 more seats per A320 or 10% of capacity, cut weight by 1,000 lbs. Using thin and lighter seats with pitch still at 33 inches, the highest in the industry. Offering with and without baggage pricing for tickets.
Nothing is static in this biz and ticket prices could come down, thought they seem stable now with hi demand, especially domestic. Consider a PE of 10-12 and stock could be anywhere from $20-30/s. Airlines are certainly unloved, thanks to Warren Buffet and years of losses. So it is a contrarian bet. Takes some nerve to be in this space, Not for everybody!
Estimates are for JBLU to make $2/year. I think that is too low. I think that jet fuel could drop to $1.50/gal from $3.25 approx few months ago.
In reading their quarterly reports, I get the impression the % hedges stay in the 15-20% range. Considering they spend $515M/q for fuel or 36% of expenses, big upside here. Conservatively, I expect $100-125M drop in fuel/q4. Jet fuel has been slow to drop. I have read that airline cost now is
Those hedges will be coming off soon. Fuel is 30% of e lenses. Plug in those numbers. The EPS look too good that I wonder if I made a mistake. Did the same with JBLU where fuel is 36% of expenses.
I think WS thinks that next year oil prices will go back above $100/B. I don't think so. New reserves, new drilling tech, etc will keep supply up. Dead growth is lame. Increase energy efficiency due to new tech too.
I suspect the market is factoring economic disruption due to falling price of oil. Bank loan defaults, etc like 1998. Unintended consequences. Otherwise, jblu will do ok. Some has been priced in.
I would suggest that you download income statement from their website to Excel. A lot of the jet fuel had been hedged until recently. Now the hedges are coming off. Look at jet fuel cost, went from $3.50/gal to $1.90/gal approx. Fuel is 37% of cost so far. Do the math. Hard to believe. They could be making at the rate of $2/s, unless there is recession or huge price pressure. Jet Blue stock lags other carriers.
Somebody please check the math.
Besides the falling price of jet fuel, what JBLU got in its favor are:
1. Using seats that have thinner cushion and frame, the company plants to add 15 seats per A320/321 or increasing capacity by 15% while saving 1,000 lbs weight Big increase in revenue with minimal incremental cost. Seat pitch at 33" is still greater that just about every airline.
2. The company will delay taking delivery of the A320/321 neo due to the increase in seats. Big savings in capex.
3. The company will offer tiered pricing with options for luggage choices, etc. Passengers can still get free first bag if they choose the pricier ticket. Then the company is offering Mint seats that are like business class.
4. In this Q only 25% of the fuel has been hedged. Fuel makes up for 37% of the expenses. I do not think the big drop in jet fuel is priced in. There is a lot skepticism that crude oil price will quickly recover. I do not think so. The Saudis play the long game.
5. Airlines have pricing power with just a few carriers around, for now.
I bought a new position today because of potential upside due fall in oil prices. The price of oil has fallen more than 30% this year. Since the airlines have pricing power due to reduced competition, a lot of the savings will go to bottom line. Most of these savings have not been priced in. Furthermore, the price oil will continue to fall like it did in 1980s. I think $40-60/b range is possible. Fuel is 30% of operating costs, so there are huge operating leverages. I suspect the new CEO will nickel and dime the passengers to boost profits.
The oil industry and Wall Street believe the fall in oil prices is temporary. I don't think so. Exploration, drilling, production tech has improved significantly. Huge reserves have been found worldwide. Plus shale. Look at the price of natural gas. Used to be $15/MBTU, now around $3-4/MBTU.
I think that $20/s for JBLU is possible.