With demand surging and pricing discipline improving across the industry, virtually every major airline in the U.S. has raised its fourth-quarter unit revenue guidance since early December. Last week, American Airlines (NASDAQ: AAL) joined the club — while JetBlue Airways (NASDAQ: JBLU) boosted its forecast for the second time.
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Stronger revenue performance will allow American Airlines and JetBlue to mitigate some of the margin pressure that they are facing due to rising fuel and labor costs. The key question for investors now is whether the carriers can continue driving strong growth in revenue per available seat mile (RASM) during 2018.
American Airlines delivers industry-leading unit revenue growth
Back in October, American Airlines projected that RASM would rise 2.5%-4.5% in the fourth quarter. This was the strongest revenue forecast provided by any major airline. However, American Airlines was still able to beat its guidance.
On Wednesday, American Airlines revealed that it now expects to report a 5%-6% RASM increase for Q4. The company’s guidance for non-fuel unit costs also improved slightly, as flight cancellations came in lower than expected. On the other hand, American increased its estimate for jet fuel costs by $0.08 per gallon, as fuel prices rose during the quarter.
The net result is that American Airlines has increased its Q4 adjusted pre-tax margin forecast range from 4.5%-6.5% to 6.5%-7%. Still, that would be down from 7.9% a year earlier.
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JetBlue salvages its fourth-quarter performance
Unlike American Airlines, JetBlue entered Q4 with a very weak unit revenue trajectory. JetBlue has a huge footprint in the Caribbean (especially Puerto Rico) and Florida, so it was hit harder than any other airline by the devastation of Hurricanes Irma and Maria. In late October, the carrier estimated that RASM would be flat or decline up to 3% in the fourth quarter.
Fortunately, demand for trips to Florida bounced back quickly. Furthermore, in the aftermath of Hurricane Maria, JetBlue began to shift capacity from the Caribbean to other leisure markets in order to match demand trends.
As a result, JetBlue raised its RASM guidance by about 2 percentage points last month. Even this was too conservative. JetBlue announced on Thursday that RASM actually rose by about 1.8% last quarter, exceeding the high end of its updated guidance range.
Even with 1.8% RASM growth, JetBlue experienced severe margin deterioration last quarter. The combination of rising fuel prices, hurricane-related costs, wage increases, a $1,000 “tax reform” bonus awarded to JetBlue employees, and the timing of certain expenses will drive all-in unit costs up by about 11% in Q4. While JetBlue doesn’t provide formal margin guidance, it seems likely to post a pre-tax margin of 9%-10% for the fourth quarter, down from 16.7% a year earlier.
Despite recent margin pressure, JetBlue is a better bet for 2018
While American Airlines ended 2017 with strong unit revenue momentum, it will face tough year-over-year comparisons in 2018. This could slow its RASM growth. Rising competition from United Continental — particularly in Chicago and Los Angeles — could create additional pressure.
Furthermore, during the first three quarters of 2017, American Airlines benefited from its large footprint in Latin America, posting double-digit unit revenue growth in that region. It’s unlikely that American can repeat that performance in 2018, especially since the strong revenue environment there is sure to attract competition. For example, Delta Air Lines recently started flying from New York to Rio de Janeiro, breaking American Airlines’ monopoly on that route.
By contrast, JetBlue’s unit revenue growth seems likely to accelerate during 2018. Whereas American is set to end 2017 with full-year RASM growth of roughly 4%, JetBlue’s full-year RASM growth will be a little more than 1%, giving it much easier year-over-year comparisons going forward.
To be sure, JetBlue faces competitive headwinds of its own, such as Delta’s steady growth in Boston. That said, it faced unusual revenue challenges last year related to air traffic control delays and the hurricanes, and these issues aren’t likely to impact 2018. The recent expansion of its Mint premium service should provide an extra unit revenue lift in 2018, as well.
With jet fuel prices currently up about $0.40 per gallon year over year, airlines will need mid-single-digit RASM growth to hold their pre-tax margins steady this year. JetBlue seems more likely to achieve that than American. Given that it is also starting with higher profitability and a far stronger balance sheet, JetBlue seems like a much better investment than American Airlines right now.
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Adam Levine-Weinberg owns shares of Delta Air Lines and JetBlue Airways and is long January 2019 $10 calls on JetBlue Airways. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.
