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For the most part, the airline industry never recovered after COVID lockdowns. Across the board, airlines faced immense losses during 2020, causing nearly all to face tremendous debt growth. For some, that issue has been exacerbated by the sharp rise in interest rates, compounding their overall interest expense. Following the end of the lockdowns, airlines have faced significant pilot and worker shortages and moderately higher fuel costs, causing a more substantial decline in most’s net interest margins.
In general, low-cost and discount airlines have fared worse as they struggle the most to retain pilots. JetBlue (NASDAQ:JBLU) is one notable example. Like Spirit (SAVE), it faces immense headwinds as its pilot turnover increases and younger pilots seek experience and quickly leave for larger airlines. From this standpoint, airlines are quickly becoming an example of the economic theory of zero profits.
A perfectly competitive market will drive profits toward zero as companies compete for workers and revenues. JetBlue, being positioned awkwardly without a niche (i.e., Hawaiian, Southwest, Alaska) and lacking market dominance (i.e., Delta, United, and American), lacks any clear competitive edge.
Considering JetBlue’s ongoing failure to earn an operating profit and weakening balance sheet outlook, it seems an excellent time to cover the stock. In my view, airlines face a growing war of attrition that will, as in the past, likely leave numerous airlines defunct over the coming years. Given its current situation, I think JetBlue may be at high risk of following in that direction.
Carl Icahn Might Be Bad News for JBLU
JetBlue was close to solidifying market dominance in low-cost airlines by buying Spirit Airlines. The deal was blocked as a Federal judge ruled that the merger would eliminate primary competition in the low-cost market. As a result, JetBlue’s pilot union had increased efforts to create a better collective agreement that would increase pilot pay toward competitive standards, which are incredibly high today. JetBlue’s labor issue has become so extreme that it recently began to buy out non-union employees and pay pilots not to fly. To me, the company is clearly acting as if it is in dire circumstances.
Of course, there are some silver linings to JetBlue’s situation. Carl Icahn recently disclosed a 9.91% stake in the company, causing it to shoot around 20% higher. With him gaining positions on the board, many expect Icahn to deploy capital to JetBlue if the SAVE deal ultimately falls through, which appears likely. Crucially, JetBlue agreed to pay Spirit $470M combined if regulators blocked the deal, and it is unclear if the company will manage to dispute this hefty breakup fee.
While many see Ichan as a savior, it should be noted that his wealth has generally declined due to poor decisions in recent years, with his Ichan Enterprises LP (IEP) losing around 73% of its value over the past five years and 83% over the past ten. Thus, we should not necessarily conclude that Icahn will save Jet Blue. Indeed, some reasonably argue that his bias toward short-term “shareholder value” efforts over long-term fundamentals may leave JBLU in a worse position.
As one example, JetBlue’s most significant issue today is rising pilot costs. It is focusing on trying to maintain pilots in the long term. So, if Icahn looks to improve short-term profits by not negotiating with pilot unions as much, the company could see a short-term profit improvement followed by a more considerable increase in employee turnover. That is a speculative view, but the fact is that JetBlue needs to focus on creating a long-term edge. Its deal with Spirit could have been a part of that by giving it dominance in the low-cost market. However, without Spirit, I expect its labor and price competition issues will only grow.
JetBlue’s Competitive Failure Likely Permanent
Today, JetBlue is facing a multi-front competitive failure. Its revenue per share is declining as more people use established airlines or those with lower costs like Spirit. This theme is seen across many industries today with the rise of “bifurcation” from “discount” to “luxury” companies. As with many US households, people today feel richer than ever or poorer as wage growth for high-income earners remains high while wages for low-income earners continue to slip compared to inflation. Companies like JetBlue, which focus on the middle, are poorly suited to this environment as households either splurge on better airlines or opt for those that are even cheaper.
Still, discount airlines face added issues as they have a competitive disadvantage for pilots and other workers. Companies such as JetBlue and Southwest (LUV) are facing combined difficulties as their revenues and margins slip simultaneously. JetBlue’s situation appears worse than Southwest’s, as it has essentially failed to bring its operating profits back above zero since 2020. See below:
With JetBlue’s revenue declining and its operating margins remaining negative, the company’s long-term survival potential appears limited, particularly in light of its potentially significant charge to Spirit Airlines and its pilot union negotiations. On top of that, the company’s interest expenses now run around $211M annually, while its operating income appears stuck in negative territory. While most airlines naturally have negative working capital, JetBlue’s has become considerably worse in recent years, around -65% of its current market capitalization. See below:
The Altman Z-score is a tool used to predict the odds of bankruptcy. Generally, values below 1-2 are considered troubling; however, the index is best modified slightly for airlines because they naturally use higher leverage and lower working capital. Of course, airlines have historically been one of the highest bankruptcy risk industries in the US. Further, an old in-depth study found that the index predicts airlines’ bankruptcy. From that view, the number itself is not as telling for airlines, but the score compared to other airlines is a measure of relative bankruptcy risk. See below:
JetBlue ranks toward the bottom of this list despite being in the middle back in 2020. Thus, JetBlue has both higher relative risk and a larger determination in recent years due to its poor positioning in the post-COVID era airline market. The larger US airlines, American (AAL) and Delta (DAL) fare worse than JetBlue; however, their bankruptcy risk is likely lower due to their large size and market dominance. The discount airlines Frontier (ULCC) and Spirit (SAVE) are also worse than JetBlue. Hence, the three have been in competing merger talks, all of which have failed.
The low-cost airlines do not appear likely to survive amid the high debt they incurred in 2020. Allegiant generally avoided the worst of that issue by focusing on regional airports. There’s also the private Breeze Airways, which has exploded in recent years, benefiting from launching just after the worst COVID lockdowns, ironically founded by JetBlue’s founder, David Neeleman. The fact that Breeze launched just after 2020 is crucial because the company lacks the massive debt growth that its competitors faced that year, likely leaving it at an immense competitive advantage. Sadly, the best companies to invest in are almost always privately owned.
JetBlue’s Survival Potential Appears Limited
Overall, I believe it is unlikely JetBlue will survive in the long term. The company is failing in generally good times for the airline industry, at least regarding high household spending on air travel. In my view, JetBlue lacks a competitive niche, and its financial situation, in both its income and balance sheets, is abysmal. I believe JBLU was more fairly valued at $4, which it traded at the end of 2023 before its recent rebound, which may prove to be a “dead cat bounce.”
Further, while Carl Icahn’s investment may prolong its life, it is also a sign that the company is in a failing position and, historically speaking, Carl Icahn has not had the best performance at activist investing in recent years. In fact, IEP has had no positive returns, including dividends, in over eleven years. Importantly, there are no clear plans as to how Icahn plans to improve JetBlue. Historically, Icahn’s focus is on improving short-term value by reducing costs through layoffs. Considering JetBlue has a labor retention issue, it seems Icahn’s historical approach would not work very well. In the 1980s, Ichan purchased the airline TWA and greatly increased its debt, resulting in one of his largest failures.
I am bearish on JBLU, but I would not short-sell it. For one, there is some potential that the JBLU SAVE deal will be restored. While I doubt that will occur, I also doubt that failing discount airlines will survive unless they’re merged so that the merger may be a “pro-jobs” decision. However, for the most part, I don’t take positions in stocks subject to the Federal government because, in my view, the Federal government makes decisions based on far too many variables that don’t always relate to economics.
Further, around 11% of JBLU’s shares are short-sold today, giving it some risk of a short-squeeze, but that likely played out earlier this month after Icahn’s stake was disclosed. That said, I believe value investors looking to join in Icahn’s efforts will likely find themselves in a value trap by 2025.
In the future, it is possible that Icahn will have learned from his mistakes in TWA and push JetBlue into a more prosperous future. There is some potential that a recession may aid JetBlue by ending the pilot shortage and shifting some air travel sales toward lower-cost airlines like JetBlue. JetBlue’s valuation is also relatively low, potentially improving its upside if it can consistently earn a profit. Personally, I doubt any of those potentials will unfold. However, that is enough reason that I do not believe JBLU is a short-opportunity today.
