JetBlue Wins Flight Auction - Analyst Blog

JetBlue (JBLU) has made its way through the flight auction at New York's LaGuardia and Washington's Reagan airports, edging out one of the largest discounted airlines –– Southwest (LUV).  Through this auction, JetBlue received eight pairs of roundtrip slots at each of these airports.

Further, JetBlue's subsidiary, WestJet Airlines Ltd. (WJA) also received eight other flight slots auctioned at LaGuardia airport.

Despite the financial turmoil including higher fuel prices, weak demand and challenging weather conditions, JetBlue managed to post record revenues in the recently concluded quarter, encouraging flight additions. Recently, JetBlue also announced its expansion plans in the Caribbean islands. The company will begin non-stop twice-daily flights from Fort Lauderdale, Florida to Kingston, Jamaica from April 30, 2012. Additionally, JetBlue will introduce two daily flights connecting San Juan, Puerto Rico, and Ft. Lauderdale in May 2012.

Fare hikes and rising demand from the emerging markets have attracted many other players in the airline industry to add flights. Companies like Delta (DAL), Southwest and United Continental (UAL) are also seeking network expansion at new international routes.

In March 2012, Delta will add services from New York-JFK to various destinations in Latin America and non-stop new flights between New York-LaGuardia and Nassau, Bahamas. Delta will also connect seven U.S. cities like Austin, Jacksonville, Kansas City, New Orleans, Milwaukee, San Francisco and Los Angeles with JFK airport in June 2012. Further, the carrier will also introduce 12 daily flights to 11 domestic and Caribbean markets during the first half of 2012 to capitalize on the surge in air travel on these routes.

Continental commenced daily flights between Houston's Bush Intercontinental Airport and Lagos, Nigeria, on November 16. United will begin its non-stop daily flights between New York/Newark Liberty and Buenos Aires, Argentina, in April 2012 and Continental will fly between New York/Newark Liberty to Frankfurt Airport from January 2, 2012.

With respect to domestic airlines, Southwest Airline was the first to announce new international flights connecting Houston Hobby to San Juan, Puerto Rico, and to three other cities in Mexico. The carrier will begin these services by May 2012.

Additionally, AirTran, the subsidiary of Southwest is also slated to fly between Ft. Lauderdale, Hollywood and San Juan, Puerto Rico and Denver. Trailing a little behind, JetBlue will also add two daily flights connecting San Juan, Puerto Rico, and Ft. Lauderdale in May next year.

The host of services introduced on new and existing networks reflects a positive momentum in the airline industry for the upcoming year. Apart from their dwindling cost structures, these carriers remained challenged by inclement weather conditions and the fluctuating economy in the past quarters. Nevertheless, the carriers are expected to hit the growth trajectory based on improving passenger traffic and cargo volumes, particularly in international routes, as well as aggressive fare hikes.

The International Air Transport Association projects demand growth of 5.9% in the current year and 4.6% in the following year. Further, the Association expects revenues to increase up to $632 billion on aggressive fare hikes. However, the profit margin is expected to be only 1.2% for 2011 and 0.8% for 2012 given the negative impacts of fuel prices.

As a result, we remain cautious on these stocks and continue to maintain our long-term Neutral rating on Delta Air Lines, United Continental, Southwest Airlines and JetBlue.