As an occasional JetBlue flyer I can say that it is not my first choice for air travel. I never flew Alaska Air, but as the old saying goes you can’t argue with success. By success, for the purpose of this article we mean an investment measurement called RASM. RASM is an acronym for Revenue per Available Seat Mile which translates into how much money an airline makes based on the actual seating capacity of a given flight. For example, the RASM for a flight from Atlanta to Boston that has a capacity of 200 seats will be higher when 175 seats are filled versus a flight that has only 100 seats occupied.
When it comes to increasing the efficiency and profitability of an airline using RASM there are a number of things that can be done to affect the final valuation. The number of flights can be reduced, which would reduce the total number of available seats. Removing or shortening the distance of destinations will reduce the number of miles flown, increasing the RASM. This is a common valuation method of the overall profitability of an airline, so end of quarter and end of year results are critical in determining the future price of the stock.
JetBlue (NASDAQ: JBLU) and Alaska Air (NYSE:ALK) have managed to make the necessary adjustments to give investors hope for 2019. JetBlue’s RASM ended the year at 2% but is expected to hit 4% in 2019, while Alaska Air had a negative RASM but is projected to make up for the minor decline and rise to 3.5% by the end of the year.
The reason for JetBlue’s stock optimism is that to achieve its 4% projected RASM it has cancelled underperforming routes. In conjunction with increasing baggage fees, a trend that has gripped most of the major airlines, and making positive adjustments to other fees the company’s overall revenue stream is expected to increase. Though growth is at the heart of the profitability of many businesses, JetBlue has opted to slow its growth to increase the value of its stock in the short term.
As for Alaska Air, its slight decline was the result of a hangover from 2016 when it decided to buy Virgin Airlines. While many analysts saw this as a good move given the structure of Alaska Air, there were adjustments expected by Alaska over the long term to make the purchase work. It took actions similar to JetBlue: it changed some of its routes, increased a select number of fees, and modified its fare structure to spread the risk around.
Both companies share similar potential positives and negatives as they move forward into 2019. One positive is they both focused on the domestic sector, taking advantage of the 2018 bull market and the increased demand that accompanied it. One negative they share in common moving forward is the price of oil/jet fuel. Alaska Air suffered in this area in mid-2018 by having to deal with a more than 28% price increase in fuel costs. While they have made the adjustment and are looking for a financially positive 2019, should oil prices start to rise both JetBlue and Alaska will find themselves fighting for profitability just like every other airline. Finally, for investors in the airline sector both airlines’ stocks are relatively cheap.
Their cost of operations has been stabilized using similar pricing strategies, but the question is where do they go from here should the airline industry continue to falter? There are only so many flights you can cut, and baggage fees can only go so high until the public refuses to book their flights and opt for their competitors. As we have mentioned the importance of the RASM, passengers who flee to other airlines have multiple impacts on the company’s revenues – a domino effect in some sense. Revenues decrease, empty seats cause the RASM to decline, and the reputation of the airline takes a hit with the potential of even fewer bookings.
Are JetBlue and Alaska Air worth of a buy consideration at this early point in the year? All the measurements point to an enthusiastic “yes” and investors should pay particular attention to the bargain price of the stock should all go well. The industry appears to be rising into clear skies, and the groundwork both companies made in 2018 can be expected to result in a turbulent free 2019.