JetBlue Airlines (JBLU) is a low-cost airline. Started in 1999, the company serves nearly 100 destinations in the United States, the Caribbean and Latin America, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.

JetBlue’s revenue of $8.1 billion in 2019 makes it a niche flyer compared to the much larger $45 billion in revenues for major legacy carriers and about $22 billion for Southwest Airlines.

Its low fares and high customer service ratings have built strong brand loyalty, while its low costs have helped JetBlue produce high margins. Its TrueBlue mileage awards program, which sells miles to credit card issuers, is a recurring source of profits.

Our original thesis on JetBlue played out. With widespread vaccinations in the U.S., consumers (and eventually business travelers) are returning to flying. Recent first-quarter results were encouraging. Revenue fell 61% from a year ago yet is ramping gradually toward more normal levels.

Impressive capacity and cost reductions are allowing the company to minimize its cash burn, while timely capital-raising has preserved the company’s financial flexibility albeit at the cost of some dilution. Once customer demand in 2022 fully recovers, JetBlue should produce larger profits than in 2019 due to its now-lower cost structure.

We recently sold our position in JetBlue with a healthy profit. Our decision was based partly on valuation and partly on fundamentals. The share price surpassed our initial target and was approaching our newer, higher target.

Fundamentally, two new discount airlines are launching this year, and major airlines are becoming more aggressive, raising the specter of new price wars and a collapse of pricing discipline. Also, fuel costs have risen this year along with oil prices, creating a profit margin headwind for 20-25% of its cost structure.

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