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Is JetBlue Airways a Buy?

Lou Whiteman, The Motley Fool

Shares of JetBlue Airways (NASDAQ: JBLU) have been stuck on the tarmac, lagging most of the rest of the industry over the past three years. The company has been plagued by sky-high expenses and inconsistent demand on top of the volatile fuel prices all airlines have had to weather.

JetBlue was an industry darling in the years after its 2000 debut, and current management has a plan in place to regain that status among investors. The company hopes to double earnings by 2020, reversing steep profit declines in 2017 and 2018.

A line of JetBlue tail fins.

JetBlue is looking to regain its cruising altitude. Image source: JetBlue Airways.

The airline's first quarter continued the negative trend, with JetBlue reporting declines in revenue and earnings . But management expressed confidence its plan is on track and should begin to show results in the second half of this year.

Let's look at the airline's plan to get back to a cruising altitude and consider whether JetBlue stock is a buy today.

Costs down, fees up

JetBlue is in the final stages of a program announced in December 2016 designed to cut costs by upward of $300 million annually. A lot of that work is being done behind the scenes, in areas such as maintenance, and in airport staff and crew scheduling, and has been accomplished via the introduction of new software tools to better manage spare-part inventory and optimize labor hours.

The airline has also invested in technology to automate airport check-in and reduce staffing costs. All in, these incremental cost savings are expected to boost earnings per share by between $0.30 and $0.40 by next year.

JetBlue is also following industry trends to increase revenue. In 2020, the airline will roll out a no-frills basic economy ticket class aimed at the most price-sensitive shoppers, which will allow it to better compete on leisure routes and potentially add ancillary revenue via extra service fees.

The airline had already increased its checked bag fee in 2018. Some analysts have pushed for JetBlue to increase revenue by charging for in-flight internet, but with rival Delta Air Lines moving toward eliminating its Wi-Fi fee , that could be a tough lever for JetBlue to pull right now.

A more concentrated route map

Part of JetBlue's plan to increase profitability is for the airline to focus its operations around three key airports: New York's John F. Kennedy, Fort Lauderdale, Fla., and Boston. The airline is trying to increase its market share and profitability in New York without adding flights at the highly congested airport by swapping out 150-seat Airbus A320s for 200-seat A321s.

Boston has been JetBlue's primary corporate travel success story, but the airline is increasingly in a dogfight against Delta for more lucrative business customers. JetBlue is also upsizing jets in Boston to generate higher margins, and the city is the focus of JetBlue's plan to launch transatlantic flights in 2021 . The airline says that corporate customers have been clamoring for the chance to fly JetBlue to Europe, and the addition of London service could help it secure more corporate travel contracts.

A JetBlue plane on the tarmac.

Image source: JetBlue Airways.

Fort Lauderdale is primarily a leisure market, but JetBlue has held up well there despite competition from ultra-low-cost rivals including Spirit Airlines and Frontier Airlines. JetBlue's routes there are likely to get a boost next year when it begins offering basic economy fares -- the airline's attempt to match Spirit and others on price while still offering at least some of its higher-touch service and amenities.

Meanwhile, JetBlue is shrinking its footprint at Long Beach, Calif. -- its original West Coast hub -- and closing stations including Washington, D.C.'s Dulles airport, Daytona Beach, Fla., and St. Croix, U.S.V.I. Back in October, management estimated that its revamped network will boost revenue by $100 million to $120 million by 2020.

So is JetBlue a buy?

JetBlue CEO Robin Hayes said in April , "We remain committed to our goal of delivering earnings per share between $2.50 and $3.00 by 2020," adding that the airline expects to generate margin expansion beginning in late 2019 and into 2020. That would suggest there is substantial potential upside to the current 2020 consensus estimate of $2.27 per share.

Alas, as any vacation planner knows, talking about getting to a destination is a lot easier than getting there. One of the reasons Wall Street's 2020 estimates remain so stubbornly low is that JetBlue will have to dramatically grow revenue per available seat mile between now and 2020 to get anywhere near the $2.50 per share guidance.

JetBlue's path to $2.50 involves continuing to grow margins in Boston, New York, and Fort Lauderdale, and a hope that the new fare options will drive increased revenue and market share heading into 2020. It's a reasonable plan, but far from a given.

In the meantime, JetBlue shares are far from a bargain. The company trades at an enterprise value 7.9 times EBITDA, slightly ahead of better-performing Delta.

Existing holders will likely do fine sitting tight and letting the turnaround play out, but I see little reason to buy in right now. JetBlue is a hold.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Delta Air Lines and Spirit Airlines. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy .