JBLU Equity Research

JetBlue Airways Corporation (JBLU) NASDAQ | Industrial | Airlines

BUY Price Target $27.00 | Price $16.25

$-

$2

$4

$6

$8

$10

$12

0

2,000

4,000

6,000

No

v 1

2

Dec

20

12

Jan

13

Feb

13

Jun

e 1

3

Ap

r 1

4

May

14

Sep

14

Historical Repurchases

Number of Shares Purchased (in thousands)

Average Price

5

10

15

20

25

30

35

0 1 2 3 4 5 6 7 8 9 10

P/E

P/B

P/B, P/E Comparison (1/27/15, TTM)

4

9

14

19

0 1 2 3 4

EV/E

BIT

DA

EV/SALES

EV Multiple Comparison (1/27/15, TTM)

$6

$9

$12

$15

$18

$21

$24

$27

$30

Historical Price (1/27/15, TTM)

2017E 2018E 2019E

EPS $3.60 $3.96 $4.22

Payout Ratio 5.46% 6.01% 6.39%

Dividend $0.20 $0.24 $0.27

Cash Paid 57 69 79

Yields (%) 0.85% 0.91% 0.91%

Dividend Scenario

Flying High with JetBlue

JBLU shares are currently underpriced compared to its market peers on a P/E,

P/B, EV/SALES, and EV/EBITDA basis. Our fundamental analyses confirm that the

company is undervalued. We issue a BUY recommendation on JBLU with a price

target of $27 per share, which represents a 66% upside from the closing price on

Jan 27, 2015. We base our recommendation on the following catalysts:

Change in Leadership: In February 2015, the current CEO David Barger will be replaced by the current president Robin Hayes. Historically, Barger has served a customer friendly approach to business, as opposed to one focused on JBLUs investors. Robin Hayes has demonstrated his investor oriented management by leading JBLUs implementation of changes that will provide greaster returns for its investors. These changes include a new fare system and cabin restructuring. In a recent press release, Hayes made the following statement: The airline industry has never been more competitive, but I believe we can continue to grow profitably. As we maintain our operational focus on safety and efficiency, we will continue to expand our network in underserved markets and roll out new products that enhance the JetBlue Experience and create value for our shareholders

Latin American Dominance: JBLU generates 20.2% of its revenues from LatAm,

representing an important part of its business model moving forward. JBLU

continues to offer new routes in addition to deploying greater capacity to the

region. With a 25% CAGR in LatAm operations over the past 6 years, this strategy

has continued to be an internal form of growth for JBLU. As U.S. relations with

Cuba improve and lucrative opportunities exist in Brazil and Mexico, we believe

that JBLU further capitalize on LatAm growth.

Low Oil Prices: Jet fuel generally accounts for 30-35% of JBLUs operating

expenses. In recent months, the price of oil plummeted due to excess supply,

primarily because of increased global oil production. Meanwhile, emerging

markets have experienced lagging demand growth for oil as well. Current oil

prices are trading at less than 50% of their June 2014 value. As the price of oil

continues to remain low we are confident that JBLU will improve its margins.

Strong Future Free Cash Flow: As industry experts agree that low oil prices are

likely to continue in the foreseeable future, we expect that JBLUs short-term

margins will increase. JBLU is deferring aircraft acquisitions scheduled from

2016-2018 and 2022-2023, saving $900 million of CAPEX during our projected

period. Furthermore, the new fare system will generate greater future cash flow

as well.

Rewarding Shareholders: With a forecasted cash balance of $1bn in 2016, JBLU

will have the ability to accelerate its share repurchase plan or declare a dividend

payout. Based on our valuation of JBLU, we believe the company is undervalued

and will repurchase more shares to return value to shareholders. Additionally,

JBLU may face pressure from institutional shareholders to pay dividends as cash

flow increases.

PT

66% Upside

JBLU

VA

LUV

SAVE

WJA ALK

JBLU

LUV

ALK

VA

SAVE

ALGT

RJET

ALGT

WJA RJET

JBLU | Price Target $27.00 Jan 27, 2015

4,550 4,971 5,257

71

74 77

361

396 421

3,000

3,500

4,000

4,500

5,000

5,500

6,000

2012 2013 2014E

Figure 1. Historical Revenue Structure

Passenger Baggage fee Other

0

50

100

150

200

250

2012 2013 2014 2015 2016 2017 2018

Figure 3. Change in Fleet Structure

A320 A321 E190

Business Description

Revenue

JBLU generates a majority of its revenue from transporting passengers. In 2013,

91.4% of revenue came from airfare, 1.4% from baggage fees and 7.3% from

other sources such as reservation change fees and transportation of cargo.

Through an innovative business model and successful expansion of destination

cities and routes, JBLUs revenue has exhibited an astonishing CAGR of 18% over

the past decade.

Blue Cities JBLUs focus cities include JFK, BOS, FLL and MCO. Currently, JBLU has 36.5% of

JFKs market share and is displaying greater emphasis on international route

expansion from this hub. JBLU has exhibited expansion by opening its T5i

terminal, which is designed to facilitate international departures and arrivals at

JFK. In 2013, JBLU transported nearly 4 million passengers at BOS and continued

to successfully utilize FLL as a strategic hub for expansion into LatAm. JBLU has a

market share of 14.1% at MCO and is currently expanding into other airports

such as DCA, where its flights doubled from 2011-2013. JBLU has rapidly

increased the number of destination cities it offers while increasing revenues

and profitability (Appendix 5-8). While the company only offered 21 destinations

in 2003, today, the company provides 57 destinations in the U.S. and 30

destinations in LatAm. JBLU has experienced a CAGR of 32.8% in LatAm from

2007-2013.

JBLU Experience

According to J.D. Power and Associates 2014 surveys, JBLU was ranked first in

customer satisfaction rating for Low Cost Carriers (LCC) and Low Cost Airline

Segments. Customers were especially satisfied with JBLUs check-in, in-flight,

and flight crew service experience. JBLU customers enjoy 36 channels of free

satellite TV as well as the industrys fastest inflight Wi-Fi product, Fly-Fi, on

selected flights. The airline is well known for providing an industry leading seat

pitch of 34.7 inches and has unique customer centric policies such as the

Customer Bill of Rights and the no overbooking policy.

Fleet Structure JBLU is currently operating 130 A320s, 13 A321s and 60 E190s. In 2013, JBLU

cancelled an order of 12 E190s and deferred the delivery of 24 E190s scheduled

from 2014-2018 to 2020-2022. JBLU is choosing to replenish its fleet with A321s,

which have better fuelefficiency and greater seat capacity. The new aircraft

delivery plan signals that JBLU is focusing on improving efficiency and capacity

to satisfy its growing customer demand.

Shareholder Structure

JBLU boasts a strong institutional holding of 71.26%. This high level of institutional ownership can be viewed as a sign of confidence from the overall market. JBLUs remaining outstanding shares are held by the board of directors and other minority stakeholders at 1.46% and 27.28%, respectively (Appendix 27).

Source: Team Estimate

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Figure 4. Industrial vs. GDP Growth

Airline Industry GDP

Source: Trading Economics

0

10,000

20,000

30,000

40,000

50,000

0

60,000

120,000

180,000

240,000

300,000

FIgure 2. Historical # of Departures

Domestic International (right)

Source: Team Estimate

Source: JBLU

JBLU | Price Target $27.00 Jan 27, 2015

Industry Overview & Competitive Positioning

U.S. Economy and Airline Industry Overview

A key indicator of success in the airline industry is economic strength. Supported

by a 5.6% unemployment rate, the U.S. has exhibited strong GDP in Q3 and Q4

with 4.2% and 5% annualized growth, respectively. The World Bank expects that

U.S. GDP will grow roughly 3.2-3.6% in 2015, which will result in increased

discretionary income for Americans, benefiting the airline industry. Due to

strength in the economy, we expect GDP growth. However, we remain cognizant

that substantial decreases in oil prices could temporarily disrupt GDP growth

moving into 2015.

Another key indicator of airline industry success is the Consumer Confidence

Index. In 2008 the CCI reached a reco