Hailey Davis, Gino Jo, Beto Ramos, Bridget Parsells Equity Research | February 18, 2016 | NYSE: JBLU NYSE: JBLU Current Price: $21 Intrinsic Value: $29 Target Price: $35 Implied Return: 33% Recommendation Company Profile JetBlue Airways Corporation is a U.S. based low-cost passenger airline. The company operates primarily on point-to-point routes with its fleet of 13 Airbus A321, 130 Airbus A320, and 60 Embraer E190 aircrafts. JetBlue’s recent price BUY pullback, attractive growth prospects, and strong financial position provide an deep undervaluation of over 30%. Key Statistics One Year Price Performance Sector: Services JBLU S&P 500 60% Industry: Regional Airlines 45% Market cap: $6.69B 52 week high: $27.26 30% 52 week low: $16.26 15% Trailing P/E: 10.72 Forward P/E: 8.01 P/S: 1.01 0% EV/EBITDA: 4.71 Beta: 1.01 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ROA: 7% ROE: 21.3% Catalysts Investment Thesis - Superior business model - Continued growth in demand driven by brand recognition with - Greater financial stability the “JetBlue experience” - Loyalty program - Competitive cost structure - Sustained low oil prices - High value geography - Cabin restyling program - Pullback fueled by recession fears creates buying opportunity Recommendation: BUY Investment Thesis Breakdown Brand Recognition with the “JetBlue Experience” The “JetBlue Experience” is a distinctive flying experience that J.D. Power 2015 Airline Satisfaction continues to attract new customers. JetBlue is the carrier of choice for travelers who have been underserved by other airlines as it offers a JetBlue Airlines 801 superior flying experience coupled with excellent customer service. JetBlue continues to innovate in products such as Mint, its premium Southwest Airlines 781 transcontinental service launched between New York and Los Angeles and between New York and San Fransisco. Mint offers 16 seats with a Segment Average 766 premium fully lie-flat bed. Within six months of its release, revenues jumped 20%. Due to its popularity, we expect the Mint service to continue to drive demand in the future. WestJet 715 In the first half of 2015, JetBlue rolled out its Fare Families pricing AirTran Airways 702 model allowing customers to choose from a number of options, with all fares complementing its core offering of free in-flight entertainment, Frontier Airlines 659 free brand name snacks and non-alcoholic beverages. This system allows customers to select the products or services they need and value most when they travel, without paying for the things they do not. Upon arrival, customers are welcomed by dedicated crew members and are able to purchase from a selection of ancillary amenities like Even More Speed, offering them an expedited security experience. Out of all U.S. airlines, JetBlue’s standard fares include the most comfortable seats with the most legroom in the main cabin out of any airline. Additionally, JetBlue offers flyers the option to purchase Even More Space seats with additional legroom. Competitive Costs With legacy carriers such as American, United, and Delta having lowered their cost structures through restructuring during bankruptcy periods, JetBlue took additional measures to obtain its superior cost advantage. JetBlue is inducting the more fuel efficient Airbus A321 into its fleet, which according to JetBlue, are 10-15% more cost efficient than the Airbus A320. Additionally, the firm is installing curved wing extensions called “Sharklets” onto its existing Airbus A320s, providing a further 3-4% improvement in fuel efficiency on long-haul transcontinental routes. JetBlue utilizes its higher aircraft efficiently to spread its fixed costs over a greater number of flights and available seat miles. During 2014, its aircrafts operated an average 11.8 hours per day. In addition, the average age of its fleet is 7.8 years, which is the youngest of any major U.S. airline. Operating young fleets and incorporating the latest technologies have resulted in aircrafts being more efficient and dependable compared to other fleets. Equity Research | February 18, 2016 | NYSE: JBLU Analysts: Hailey Davis, Gino Jo, Beto Ramos, Bridget Parsells 2 Recommendation: BUY Investment Thesis Continued High Value Geography Passengers Daily flights JetBlue is a predominantly point-to-point system carrier, with the majority of its routes servicing New York, Boston, Fort 35 1000 Lauderdale - Hollywood, Orlando, Long-Beach and San Juan, 33 900 Puerto Rico. During 2014, over 86% of its customers flew on non-stop itineraries. 30 800 millions The top five fastest growing cities in the United States are 28 700 Passengers in Seattle, Los Angeles, Orlando, Las Vegas, and Atlanta. Out of 25 600 the five, JetBlue operates in four of these cities, ultimately 2011 2012 2013 2014 2015 increasing its domestic capacity growth. JetBlue plans to grow its market share by expanding into the Latin American and Caribbean markets. JetBlue recently announced that it plans to add more routes to Barbados. JetBlue currently operates daily flights to Barbados from New York and Boston, with plans to add additional daily flights to the island by April 2016. Given how successful JetBlue has been with its previous expansions, the new route can be expected to boost revenues going forward. Cabin Restyling Program JetBlue is expected to roll-out its cabin restyling program Average fleet-wide legroom (inches) during the second half of 2016. The firm plans on introducing Airbus’ innovative galley and lavatory model on its all-core JetBlue 33.1 A321 in July, freeing up valuable onboard real estate. The A321 typically carries 190 passengers. However, after the Virgin 32.6 restyling of the aircraft, it will be able to carry 200 passengers Alaska 31.9 by the end of 2016. We expect this to increase JetBlue’s load factor capacity as it will increase Available Seat Miles and WestJest 31.9 revenue per passenger miles (see appendices #17). American 31.8 The new restyling program will also introduce a fully connected in-seat experience that meets the needs of Southwest 31.4 travelers today, furthering its focus on connectivity, comfort, and space. In addition to the best legroom in the industry, Spirit 28.3 JetBlue continues to provide the premier base-fare flying 29.5 31 32.5 34 experience. Equity Research | February 18, 2016 | NYSE: JBLU Analysts: Hailey Davis, Gino Jo, Beto Ramos, Bridget Parsells 3 Recommendation: BUY What is the Market Missing? - Increase in Available Seat Miles driven by new routes, more seats per aircraft, and higher demand driven by superior accommodations - Ability to capitalize on its multiple regional expansions and capture a growing portion of market share from its competitors on new routes - Growing brand recognition based on its superior business model - Relatively low oil prices for the foreseeable future Competitor Analysis - Southwest Airlines: A commuter-focused airline with a business model catering to people looking for quick and cheap flight from point to point. Only utilizes one type of aircraft: the Boeing 737. - Spirit: An extremely low-fare, high-fees airline with a business model catering to the most price sensitive flyers. While Spirit’s fares are cheap, it does not offer baseline accommodations including water, reclining seats, or baggage. - WestJet: Low-fair Canadian airline focused on delivering superior customer service. Expanding to a hybrid model in order to expand its customer base. JetBlue’s business model pins it in the higher-end of the midrange aircraft segment. It’s closest competitor, Southwest Airlines, provides similar fares at a lower flying experience. The firm’s flight experience is comparable to the high-end of airlines competing with American Airlines and Delta Airlines, while providing a more affordable base-fare price. As JetBlue continues to expand nationwide, it will capture market share from both the lower and higher end of its competitive segment. See appendices page 16 for a competitor analysis. Breakeven Cost Per Passenger Pre-Tax Profit Per Passenger $400 $300 $200 $100 $0 Spirit Southwest jetBlue Alaska American Delta United Equity Research | February 18, 2016 | NYSE: JBLU Analysts: Hailey Davis, Gino Jo, Beto Ramos, Bridget Parsells 4 Recommendation: BUY Industry Analysis U.S. Domestic Airline Industry Domestic trips by U.S. residents The U.S. domestic airline industry is expected to soar over the forecast next five years as economic conditions continue to improve with 800 consumers and business people taking more trips. Industry revenue is projected to increase at an annualized rate of 4.6% to 750 $197.1 billion over the five years to 2020. Volatile oil prices will remain a threat, but are expected to remain suppressed for the foreseeable future. Furthermore, low-cost airlines are expected to 700 expand revenues in the future, with recent industry consolidation In millions leading to higher competition among conglomerates. 650 A greater number of business passengers, rising disposable incomes and increases in services offered will support revenue 600 growth over the next five years. As household incomes grow 2011 2013 2015 2017 2019 worldwide, demand for domestic trips is forecasted to increase at a faster rate than it did in the past five years, growing by 1.6% Per capita disposible per year on average through 2020. The main factors supporting income forecast this trend will be lower ticket prices and higher incomes. $44,000 The load factor of U.S.-operated aircraft is also increasing. A higher load factor has the potential to increase airline revenue, $42,000 which can occur in two ways. First, aircraft can operate more efficiently and achieve higher returns by filling empty seats, $40,000 ensuring that airlines are operating near maximum capacity. Second, airlines use yield-management software to anticipate In millions demand and extract the highest possible price per seat. As $38,000 seats fill up, prices for the remaining seats increases.