There is still no official word on the end of the pandemic. However, if investors understand the market’s language, there is a clear shift away from stocks that have been hot during the pandemic. Zoom Video (ZM) and Peloton Interactive (PTON) are some examples of stocks going out of favor as investors snap up post-pandemic plays.
The travel and tourism sector was among the worst impacted during the pandemic, and recovery seems to be underway. JetBlue Airways (JBLU) is among those positioned to benefit from the pent-up demand for travel.
I am bullish on JBLU for 2022, and I believe that the fundamentally strong airline stock is poised for a meaningful rally. (See Analysts’ Top Stocks on TipRanks)
Industry Outlook
Let’s first talk about the industry outlook. The International Air Transport Association believes that global travel will reach 61% of 2019 levels in 2022. Of course, travel within the country is likely to be even better.
Just to put things into perspective, the Adobe Digital Economy Index estimates that Thanksgiving flight bookings are likely to be 3.2% higher as compared to 2019 (pre-pandemic levels). Clearly, the industry is on a recovery path, and a rally for airline stocks seems impending.
It’s also worth noting that JBLU stock is only 5.8% higher year-to-date in 2021. The stock has been in a period of extended consolidation, and favorable industry tailwinds can serve as a potential catalyst for a break-out.
Strong Fundamentals to Support Growth
The post-pandemic period will be an extended phase of balance sheet repairs for most big airline players.
JetBlue is among the few exceptions. As of Q3 2021, the airline company reported an adjusted debt-to-capital ratio of 53%. Further, the company reported $3.3 billion in liquidity.
With a strong balance sheet, JetBlue will be positioned to pursue growth. As a matter of fact, the company reported an order book of 141 aircraft to be delivered through 2027. This is likely to ensure sustained revenue and EBITDA growth.
From the perspective of growth, the Northeast Alliance with American Airlines (AAL) is also likely to deliver results. JetBlue is likely to increase frequencies and launch 58 new routes, including 18 international routes.
JetBlue has also partnered with Royal Caribbean (RCL) to launch a combined flight and cruise package. This will allow customers to book flights, cruises, and hotels in one place. The key point to note is that JetBlue has been innovating or looking for partnerships. This is likely to boost post-pandemic ticket sales.
Rising Fuel Cost a Concern
Amidst these positives, rising fuel cost is a concern. JetBlue reported an average fuel cost per gallon of $1.23 for Q3 2020.
However, for the most recent quarter, the fuel cost per gallon increased to $2.08. This is likely to impact margins even as capacity utilization improves in the coming quarters.
However, rising fuel cost is likely to be partially offset by the company’s initiative to maintain fixed cost and drive operating leverage through higher productivity.
The impact can already be seen. For Q3 2021, JetBlue reported an operating expense per available seat mile of $9.39. For Q3 2020, the operating expense per ASM was $14.64.
Operating expense (excluding fuel cost) is likely to decline further as capacity utilization increases.
Wall Street’s Take
Turning to Wall Street, JetBlue has a Moderate Buy consensus rating, based on four Buys, three Holds, and one Sell rating assigned in the past three months.
The average JetBlue price target of $20.00 implies 31% upside potential.
Concluding Views
JetBlue has navigated the worst of the crisis and cash burn. With a substantial liquidity buffer, it’s unlikely that further financing will be required in the near term.
As passenger capacity increases, JetBlue is positioned for renewed revenue growth. Even with rising fuel costs, JBLU stock will likely trend higher from oversold levels.
Furthermore, as new aircraft are delivered in the coming years, top-line growth will sustain. These factors make the stock worth considering.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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