JetBlue Airways analysis: the black sheep of airlines may have made another misstep

The airlines have been hit by covid and a huge drop in revenue. Most of them are slowly recovering from the problems. But that's not the case with JetBlue, which opted for an extremely risky acquisition. Is this a wise choice?

Basic overview

JetBlue Airways $JBLU is an American low-cost airline based in New York City. Founded in 1999, it operates over 1,000 daily flights to more than 100 destinations in the US, Caribbean and Latin America.

The fleet includes more than 260 aircraft, mostly Airbus A320 and Airbus A220. JetBlue has more than 70 additional aircraft on order, with its main hub at JFK Airport in New York. Other major hub destinations include Boston, Fort Lauderdale, Los Angeles, Orlando and San Juan. Known for its low fares, comfortable cabins, and free services like Wi-Fi, live TV, etc., JetBlue has over 20,000 employees and handled over 46 million passengers in 2019.

2021 has not yet returned to pre-pandemic levels. Source

Sector

The airline sector, especially in the US, is very competitive. JetBlue faces intense competition from several sides.

Large carriers such as American Airlines $AAL, Delta $DAL and United $UAL. These carriers dominate international and long-haul flights in the US. JetBlue competes directly with them primarily on domestic routes.Other low-cost airlines such as Southwest $LUV, Frontier and Spirit. These companies compete directly with JetBlue in the same segment - low-cost domestic flights. The competition here is really high as these companies are competing for the same customers.

To be successful, JetBlue must offer low prices, high quality service, good flight times on key routes and efficient operations. It is also key to differentiate itself from competitors through ancillary services, a loyalty programme or brand image. Strategic partnerships or alliances are limited for JetBlue for now, but may be an opportunity in the future.

Current situation

Currently, the most important development around JetBlue is the acquisition of Spirit. Spirit Airlines $SAVE will likely be acquired by JetBlue for $31 per share. This highly controversial merger is getting a lot of (expected) attention from regulators. It may be getting even more attention than expected. It was first announced on April 5, 2022.

Starting in January 2023, SAVE shareholders will receive $0.10 per month as an upfront payment from JetBlue.

If we put JetBlue and Spirit's 2021 financials together, we find that the airline will have a total of 455 aircraft. That's 61% more than JetBlue had before. The company's total revenue would be $9.268 billion, making it the sixth largest airline in the United States. Although 2021 wasn't the best year for the individual businesses, the combined company would report operating and net losses of $137 million and $655 million, respectively. Overall, a look back at the combined company shows no real benefit to the businesses.

JetBlue is expected to buy Spirit Airlines for $3.8 billion. Given that Spirit Airlines has a market capitalization of approximately $1.9 billion, the merger potential is approximately 100%. So good for Spirit, but no longer good for JetBlue shareholders. In the case of JetBlue Airlines, the company may benefit from the merger in a few years, but in the near term, the risks outweigh the benefits. The company's market capitalization is approximately $2.26 billion, far less than the price it is paying for Spirit Airlines, and the company's cash is approximately $1 billion. As a result, there will be massive dilution.

However, the question is whether this will happen. Indeed, the US Department of Justice has recently thrown obstacles in the way of this transaction by suing JetBlue in an antitrust case. Justice Department lawyers say the merger would reduce competition among U.S. airlines.

But there is a silver lining. After returning to profitability in the second half of 2022, JetBlue achieved the best Q4 operating income in the company's history. Not only that, the New York-based airline reported the highest annual revenue in 2022 in its history.

Q4 revenue of $2.4 billion marked JetBlue's best result for the period, thanks to a strong load factor of 98.2%. While JetBlue Airways ended Q4 with a net profit of $24 million and closed Q3 with a net profit of $57 million, it ended the full year with a net loss of $362 million.

Like other airlines, JetBlue acquired significant debt during the pandemic outage. Moreover, in order to grow and compete with larger airlines, JetBlue will need to take on even more debt. Some might argue that JetBlue is trying to do too much, too soon. Time will tell if the merger goes as expected, but investors should be aware of JetBlue's impending debt spiral.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own judgment. I am just an amateur sharing my opinions.