JetBlue Initiated at Neutral

We are initiating coverage on JetBlue Airways (JBLU) with a Neutral rating. Currently, the stock has a Zacks Rank of #3 (Hold).

We believe JetBlue will continue to benefit from the recently launched Sabre system, improved pricing, higher traffic, additional ancillary revenue opportunities and future commercial partnerships. However, a large exposure to New York metropolitan area, competitive threats and fuel price volatility may limit the upside potential of the stock.

Second quarter 2010 earnings were ahead of the Zacks Consensus Estimate and the year-ago level, led by the company’s stronger network in Boston and New York, high revenues, and controlled costs. JetBlue achieved the highest ever quarterly operating income in the second quarter. The company ended the quarter with unrestricted cash and short-term investments of $1 billion.

We believe JetBlue is well positioned for growth attributable to its low-cost structure, strong brand name, superior in-flight services including LiveTV, a new Sabre system, and a non-union workforce. JetBlue’s Sabre platform will provide an important engine for future revenue growth. Sabre will provide pricing flexibility that will attract more customers and broaden ancillary revenue and partnership opportunities.

JetBlue is the only non-unionized airline in the industry with the flexibility to manage its cost structure. The company continues to add new routes by expanding to the Caribbean and Latin America. JetBlue’s growing presence in Boston and unique position as the largest domestic carrier at John F. Kennedy International Airport allows it to grow and boost top line.

The company remains on track to generate positive free cash flow and maintain strong liquidity in the second half of 2010 with minimal debt maturities of $130 million and capital commitments of $360 million. Moreover, JetBlue has the most fuel efficient fleets among the major U.S. carriers, with 116 Airbus A320 aircraft and 45 EMBRAER 190 aircraft. We believe the youngest and most efficient fleet of JetBlue provides it with a competitive advantage over its peers.

Moreover, in order to manage fuel price volatility, the company has hedged its projected fuel requirements with a combination of crude call options, jet fuel swaps and heating oil collars.

On the flip side, JetBlue Airways faces significant competition with respect to routes, services, fares, flight schedules, types of aircraft, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs. Also, the company is dependent on automated systems and latest technology to run its business.

Moreover, JetBlue is depends largely on the New York metropolitan market, which accounts for approximately 60% of the company’s daily flights. Increased congestion, delays or cancellations, a reduction in demand for air travel in the New York metropolitan area, negative public perception of New York City as well as significant price increases related to higher airport access costs and fees imposed on passengers may hurt the company’s profitability.

JetBlue Airways Corporation, incorporated in Delaware in August 1998, is a passenger airline that operates primarily on point-to-point routes. The company provides high quality customer service featuring all-leather seats and live satellite television in every seatback. JetBlue’s operations primarily include transporting passengers on its aircraft within the U.S. as well as to Puerto Rico.

The company’s main competitors include AMR Corp. (AMR), Southwest Airlines (LUV), and United Airlines, a wholly owned subsidiary of UAL Corp. (UAUA).

JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report

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