By Santiago Solari from Market Realist

JetBlue outperforms its peers

At a broad level, institutional investors were bullish on JetBlue Airways (JBLU) in 1Q15. The US airline industry is in its best shape financially due to the cheaper availability of fuel, which boosted profitability and equipped firms to reduce their leverage. However, airline stocks suffered in 2015 due to investor concerns surrounding excess capacity.

JetBlue Airways, Allegiant Travel (ALGT), and Alaska Air Group (ALK) have defied industry trends. These stocks have delivered double-digit returns so far in 2015. JetBlue leads the pack with a year-to-date (or YTD) return of 40.54% after delivering an impressive 85.71% return in 2014.

In contrast, airline carriers, which are part of the SPDR Transportation ETF (XTN), in aggregate have lost 2.98% in value YTD. American Airlines Group (AAL), Republic Airways Holdings (RJET), and Spirit Airlines (SAVE) registered the biggest decline so far, posting a fall of 22.54%, 37.63%, and 21.47%, respectively.

Billionaire hedge funds create new positions

Billionaire hedge funds have taken note of JetBlue’s stellar returns, accumulating positions in the low-cost carrier. In particular, CQS Cayman LP and Appaloosa Management initiated new positions during 1Q15. CQS Cayman purchased 9.6 million shares in JetBlue, which now accounts for 8.68% of the fund’s 1Q15 long portfolio.

On the other hand, David Tepper’s Appaloosa Management bought 4.7 million shares in the company, with the position accounting for 1.59% of its portfolio.

JetBlue Airways (JBLU) forms 2.72% of XTN and 1.05% of the iShares US Transportation ETF (IYT).

Is David Tepper Trying to Capitalize On an Arbitrage Opportunity?
By Santiago Solari • Jul 20, 2015 11:20 am EDT
Appaloosa liquidates its $234 million position in American Airlines

During 1Q15, David Tepper’s Appaloosa Management sold its stake in American Airlines Group (AAL), which represented 5.77% of its US long portfolio and was worth $234 million at the end of 2014. Appaloosa also trimmed its stake in United Continental Holdings (UAL) by selling approximately 951,000 shares in the company. UAL now forms about 4.68% of the hedge fund’s portfolio, down from 8.13% in 4Q14.

In addition to purchasing a new position in JetBlue Airways (JBLU), the fund also added to its exposure in Delta Air Lines (DAL) by purchasing 1.45 million shares. The position in DAL is worth $210 million and represents 3.68% of its portfolio value. In aggregate, the fund had a 10% exposure to airlines in its portfolio.

A closer look at these trades reveals that Tepper’s hedge fund is most likely trying to capture gains by a potential mispricing among these airline stocks. In particular, JetBlue Airways has been immune to issues related to excess capacity. The airline has posted meaningful gains in its traffic while maintaining strong load factors.

On the other hand, American Airlines and United Airlines were more affected in the first quarter. These airlines struggled to maintain capacity levels and were also exposed to currency headwinds that have been weighing down their bottom lines.

Investors can gain access to airline stocks through the iShares Transportation ETF (IYT), which has a portfolio weighting of ~38% for airline stocks.
Hedge Funds Bet Big on JetBlue Airways (Part 3 of 5)
JetBlue Continues to Post Strong Operating Results
By Santiago Solari • Jul 20, 2015 11:20 am EDT
Impressive June traffic numbers

JetBlue Airways (JBLU) posted strong operational results for June 2015, with an 8.8% year-over-year (or YoY) growth in traffic (revenue passenger miles) and an 8.0% increase in capacity (available seat miles). The higher growth in traffic compared with capacity resulted in an improvement of 60 basis points in load factor (revenue passenger miles to available seat miles).

JetBlue’s operating results ranked behind the only regional airline operator, Hawaiian Holdings (HA), which posted an increase of 100 basis points in load factor. JBLU’s operating performance for June was tied with SkyWest (SKYW). However, JetBlue’s performance beat the big four carriers: American Airlines Group (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV), and United Continental Holdings (UAL).

JBLU forms 1.05% of the iShares US Transportation ETF (IYT). Since the announcement of the traffic results on July 13, JetBlue’s stock has soared by 5.1% to $22.80.

Solid 1Q15 performance

Despite challenging weather conditions, JetBlue Airways posted healthy results in the first quarter. Its 1Q15 performance was characterized by double-digit growth in revenues to $1.5 billion from $1.3 billion for the same period last year.

The revenue growth, coupled with a reduction in fuel-related expenses, resulted in a substantial improvement in net earnings of $137 million versus $4 million from a year ago. Diluted earnings per share (or EPS) for 1Q15 was $0.40, compared with $0.01 in 1Q14.

Analyst estimates for 2Q15

For the second quarter of 2015, analysts estimate JetBlue’s sales to grow by 7.56% to $1.606 billion, compared with $1.49 billion in 2Q14. The company’s operating profit is expected to grow by 106% to $290.75 million. Its net income is expected to increase by 155% to $155.89 million. The company’s 2Q15 EPS is expected to grow by 139% to $0.456, compared with $0.19 in 2Q14.

PART 4
Hedge Funds Bet Big on JetBlue Airways (Part 4 of 5)
Why JetBlue Could Soar Higher in 2015
By Santiago Solari • Jul 20, 2015 11:20 am EDT
Cheaper fuel benefits major carriers’ profit margins

Aircraft fuel costs typically comprise 35%–40% of an airline company’s operating expense. Jet fuel, which is a distillate of crude, has fallen by more than 40% in the last year and is currently at $1.69 a gallon.

Because fuel is one of the major variable costs that airlines incur, and given that crude oil prices are expected to remain below $60 per barrel over the next couple of years due to the supply glut, airlines can expect their profit margins to remain strong.

JetBlue reduces leverage and is less vulnerable to currency risk

Unlike some of its peers such as Delta Air Lines (DAL), American Airlines (AAL), and United Continental Holdings (UAL), JetBlue (JBLU) is not exposed to currency headwinds. This means that a strengthening dollar does not pose a challenge to its earnings.

As of the latest quarter, JetBlue has been able to lower its leverage (debt-to-equity ratio) from a high of 2.76 in fiscal 2006 to 0.71 by reducing its debt levels. Although its debt level is still higher than domestic carriers such as Alaska Air Group (ALK), it remains at a more manageable level. Holding everything else constant, with a reduction in debt levels, shareholders of highly levered firms stand to retain a larger share of operating profit through lower interest payments.

JetBlue is minting money on its premium service business

Mint, JetBlue’s premium service, was launched in June 2014 to gain access to passengers who are willing to pay more for elite-class airline travel. Mint serves the highly profitable and busy routes of New York’s JFK International Airport to Los Angeles and San Francisco. Mint offers a 16-seat premium cabin with fully reclining flat-bed seats, including four semi-private suites and 143 economy seats on several of its 11 A321s.

JetBlue has been ramping up its Mint business by systematically increasing the number of daily trips on these routes. JBLU has offered its services in these lucrative centers at highly competitive rates. The highest fare charged by JetBlue is one-third the price offered by other airlines, and this service has been received favorably by travelers. As a result, the company has been able to gain domestic market share from its rivals.

Investors can gain exposure to airline stocks by investing in transportation ETFs such as the iShares Transportation Average ETF (IYT), which holds 38% in airline stocks. The SPDR S&P Transportation ETF (XTN) has 11% of its holdings in airline stocks like Southwest Airlines (LUV), Alaska Air Group (ALK), and Spirit Airlines (SAVE).

Hedge Funds Bet Big on JetBlue Airways (Part 5 of 5)
Does It Make Sense to Add JetBlue to Your Portfolio?
By Santiago Solari • Jul 20, 2015 11:20 am EDT
JetBlue and the airline industry

Previously in this series, we discussed increased interest from hedge funds in low-cost airline operator JetBlue Airways (JBLU). We also took a look at its operating results and how the stock can continue to deliver attractive returns. In this part, we will assess whether it makes sense to have JetBlue in your portfolio on a relative value basis.

Based on a sample of 11 airline stocks belonging to the S&P Transportation ETF (XTN), the industry trades at a significant discount to the S&P 500 (SPY). The industry’s forward enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple is 5.36x, which is at a 49.8% discount to the S&P 500 multiple. Although the airlines have trailed US equities so far, we may expect meaningful improvement in their performance as we enter the second half of the year.

JetBlue, Alaska, and Delta appear to be great value picks

JetBlue Airways trades at a forward EV to EBITDA multiple of 5.35x, which is in line with its peer average. Alaska Air Group (ALK) trades at 5.55x, and Delta Air Lines (DAL) trades slightly lower at 5.00x. While airline operators as a whole appear to be undervalued compared with the broad market at this time, the aforementioned stocks stand out due to their stable cash flow generation. They are also below industry average leverage levels.

Based on Appaloosa Management’s trades executed in the first quarter of 2015, it appears that the fund was trying to exploit mispricings within the airline industry. It seems that the fund was trying to pick up gains from JetBlue and Delta, which appear to be a better bang for the buck, while eliminating or lowering exposures to stocks such as UAL and AAL.

IMAGE: air1

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