JBLU JETBlue

Disclaimer I have already taken a position in this company it is 5% of the portfolio. The purchase price was $5.46 on 01/26/2024. This is not investment advice just my own personal thoughts and actions when investing. Investments do have risk and are subject to potential for loss of principle.

" I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: 'My name is Warren and I'm an aeroholic.' And then they talk me down.”  -Warren Buffett

I should've probably got that number from Mr. Buffett but I'm to shy a person to consider that phone call to do so.

Discount

That said, my thoughts are that I have been given sufficient margin of safety relative to Normalized earning power value as well as average p/s on 10 year basis. To me, this makes a purchase of such a cyclical business sensible. More over a P/B of roughly .50 which entails I'm getting $1 for 50 cents.

Why?

The discount in price may be influenced by speculation surrounding the potential merger between SAVE and JBLU. However, I refrain from speculating on this matter and instead focus on the business fundamentals. Personally, I give low odds to the merger going through. Reinforced by the DOJ though on the merger. SAVE's CEO initially expressed skepticism about its success, which aligns with my views. In addition to that if you segment the domestic industry between all carriers v low cost carriers. You find that the low-cost carrier  sub segmentation is actually quite concentrated with LUV being x>40% of that.

Positon sizing

Essentially, my 5% allocation within the portfolio presents a scenario where it could either decrease by 50%, resulting in a 2.5% reduction in the overall portfolio, or potentially increase to comprise 10-15% of the portfolio, assuming other positions remain stable. This situation resembles a, according to Mohnish Pabrai, "heads I win, tails I don’t lose much" scenario. Considering the current discount, I believe the odds are in my favor when factoring in time.

Why not a larger weight? Well too much can go sideways with a 10%+ position due to the nature of the business and industry. I'm not as confident on cash flow stability in this scenario which will have a factor in my portfolio weight. High capex, Commodity correlated type company, lots of leverage, and an industry where any tail end probabilities can occur to make any thesis void.

Business

Regarding the business itself, I am impressed by what it offers. As a low-cost airline aiming to transition into a more efficient competitor against the major airlines, it provides a quality end product for customers. Notably, it offers more spacious seating in coach compared to other airlines, and the first-class (mint class) service appears solid. At my purchase price of $5.46 per share, I see this as a good value proposition. In short, recognizable good brand with top not services and lots of room for improvement(catalysts).

I also doubt the likelihood of the merger taking place. The recent appointment of Joanna Geraghty as CEO brings forth two potential outcomes: Route A, emphasizing faster growth through acquisition, which I am wary of due to concerns such as balance sheet deterioration and integration challenges, and Route B, focusing on slower organic growth, which I believe holds more potential for long-term value creation. Additionally, JBLU's own challenges, as highlighted in recent media coverage, indicate that they have internal issues to address from an operating standpoint.

The strategic choices remind me of the Tortoise and the Hare fable, where steady progress ultimately wins the race. However, these are merely observations from an outsider's perspective.

Long Term thinking

The business's intended destination over the next 5 years is a return to normalized earning power, a goal that management has emphasized. From what I've gathered, they are actively implementing cost-cutting measures throughout the company to achieve this objective.  I find this goal quite reasonable within the next 5 years, especially if the merger does not proceed, as the odds of success become highly favorable.

Beyond 5 years it's hard to gauge. Broadly speaking Changes in tech over the next decade should be favorable for cost savings industry wide. It's hard to see that far but the pieces are in place with country specific initiatives on emissions paving the way for industry wide evolution for 5-10+ years. But the focus here should be more on the next 5 years currently. Which, for me, is easier and more reasonably probabilistic to come to conclusion on given normal circumstances.

To increase the likelihood of achieving this position, management should prioritize focusing on the core business. Addressing existing issues and striving for excellence in their current operations should be their primary focus. While this may seem straightforward, it's undoubtedly easier said than done.

The acquisition has brought about unnecessary complications and hurdles, adding further complexity to the situation. Based on what I've learned about SAVE, it appears reminiscent of Charlie Munger's analogy –“If you mix raisins with turds, you still have turds,”. Perhaps both companies involved could be considered turds in this scenario. Alternatively, JBLU could be a grape capable of growing into a tree that can produce over a longer time frame? Time will tell.

That said, the integration costs associated with the acquisition will only serve to prolong the process. Although the merger pitch deck mentioned a 3-5 year integration timeline, it is likely to come at the expense of the balance sheet and diminish the odds of success. In my opinion, management should acknowledge the sunk costs associated with this endeavor and redirect their focus towards the slower long-term growth path, which may present greater benefits in the future. Showing other airlines that methodical growth is possible without acquisition.

Update(February 12, 2024):

There has been a material development since I began this write-up over the weekend. Carl Icahn has acquired a stake in the business. I am eager to hear what activist measures he may take for the business, if any.

Catalysts:

• Merger not going through. Jet blue official statement saying that they will no longer pursue merger.

• Carl Icahn taking positive growth approach plans. For instance optimization of the business, focus on brand building of the business and taking steps necessary for long term value creation. Hopefully not a liquidation approach as seen with TWA in the 80s.

• Company becoming cash flow positive while building momentum toward normalized operating margins.
  

Bottom line execution of current plans minus the merger.

Just an add on/food for though:

JBLU did appeal the merger. That said I did this to take a look at a different approach to why I don't think merger should/will go through.

Also to add more insight into my thoughts on the merger outcome. My first thought was.... Well LUV takes up a lot of the low-cost carrier segment which makes sense for DOJ ruling and their thought on competition given the Spirit merger goes through. Here is a different way to look at it as well.

Brief analysis based on the HHI. Disclaimer HHI is done based on broader industry. That is the appropriate way to do it. That said, given the magnitude airline ticket costs can have on a household. Example is low income household spending 2 weeks plus worth of pay to travel a whole family somewhere. That's just talking about airfare alone. I decided to sub segment this analysis to low cost carriers thus taking out other players in the calculation such as DAL, American Airlines.

That said, I don’t know if this would be considered. It is my thought process of getting to higher probability outcome quantitively. While also backing it with qualitive information that we all know. Please do note this may be a case of cherry picking, albeit sensibly.

Low-cost carrier list was on Wikipedia.

Low-Cost airliners not listed due to being private are Avelo, Breeze, New Pacific

End result is if they utilized the HHI in this manner and the change being greater than 100.

Note:

I will continue to provide updates throughout the month, including dates for each update.

My delay was due to having to create my earning power value estimate/ price targets with visuals.

Update: Feb 18, 2024

Here is my finished value for the business.

Do I consider this value likely? Absolutely. Achieving a normalized operating margin is plausible with patience and time. If the company can expand its routes and maintain productivity, I believe this valuation could be attained within 3-5 years, possibly sooner with effective execution of their strategies.

However, there are external factors like fuel costs and unionized pressures that can significantly impact outcomes, potentially weighting an unfavorable result by 20-30% or more.

Nevertheless, I remain confident in the company's prospects. Its strong brand and offerings provide substantial value at the current price point.

Despite industry challenges leading to a value below my reproduction estimate, management's successful execution and organic growth could elevate the company's value beyond my EPV estimate in the foreseeable future. Yet, it's essential to focus on the present as there's still much groundwork to cover.