Actions of JetBlue Airways (NASDAQ: JBLU) trade currently 30% below pre-Covid levels compared to a 13% drop in Southwest Airlines Shares (NYSE: LUV). JetBlue spent just $ 683 million in operating cash last year, which is well below the $ 2 billion decline in market capitalization since February 2020. Additionally, the third phase of the program Payroll support prevents airlines from returning capital to investors in the form of dividends and share buybacks. until September 2022. Therefore, given JetBlue’s steady revenue growth before the pandemic, profitability comparable to that of Southwest Airlines, and a strong balance sheet, Trefis believes the stock is an investment of good value. We compare the historical trends in revenue, margins and valuation multiples of the two companies in an interactive dashboard analysis, Southwest Airlines v JetBlue Airways: industry peers; Which action is a better bet?– some parts of which are highlighted below.
1. Income growth
JetBlue’s growth was somewhat greater than that of Southwest Airlines before the pandemic, with JetBlue’s revenue increasing at an average rate of 7%, from $ 6.6 billion in 2016 to $ 8 billion in 2019, per compared to Southwest’s revenues which grew at an annual rate of 3.4% from $ 20.2 billion in 2016 to $ 22.4 billion in 2019. With the pandemic crippling the travel and tourism industry, two companies reported a 60% (year-over-year) revenue contraction in 2020.
- To close the gap between supply and demand, JetBlue and Southwest reduced their capacity (available seat miles) by 48% and 34%, respectively, last year.
- Thus, the decrease in cash generation due to the reduction in capacity and occupancy rate has resulted in the need for government grants to support employee expenses and maintenance costs.
- In 2020, JetBlue Airways and Southwest Airlines reported $ 3 billion and $ 9 billion in total revenue, respectively.
- Both companies have seen strong revenue growth in recent quarters, helped by demand for domestic travel and a drop in new infections. (Related: United Airlines aircraft order to support long-term revenue growth)
2. Returns (Profits)
Southwest’s operating profit margin is slightly better than that of JetBlue Airways. Canceling the impact of non-cash charges, the operating cash margin is almost similar to 18%.
- In 2020, Southwest Airlines reported $ 9 billion in revenue, $ 3 billion in net losses – with a net margin of -45.6%. Likewise, JetBlue reported revenue of $ 3 billion, a net loss of $ 1.3 billion, and a net margin of -58%.
- Despite operating a fleet of 718 planes, Southwest’s cash consumption was only $ 1 billion in 2020, compared to $ 683 million for JetBlue, which operates a fleet of 267 planes. (Related: Choose the Southwest Airlines stock to fly?)
Both companies have considerably low long-term debt obligations, mainly due to government assistance during the pandemic and the steadily growing demand for air travel. According to recent filings, JetBlue declared $ 3.7 billion in cash and investments against a total debt of $ 4.4 billion. In addition, Southwest’s cash and cash equivalents are greater than its long-term debt obligations.
- Higher financial leverage coupled with continued income growth is a boon for generating excess returns from stocks. However, slow growth and a busy balance sheet negatively affect shareholder returns during times of recession.
- It is interesting to note that dividends and share buybacks are suspended until September 2022 in accordance with a clause in the CARES law. Thus, profiting from short-term declines remains a key strategy for airline stocks.
- Given the strong balance sheets of Southwest and JetBlue, we believe both stocks present a low risk of downside demand in the near term. (Related: Are the long-term trends in favor of Boeing stocks?)
What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has been regularly beating the market since 2016.
Invest with Trefis Wallets that beat the market
See everything Trefis Price estimates