The airline industry is a capital-intensive industry and thus airline companies have substantial debt on their balance sheets. The net debt plus operating leases to EBITDAR is one of the key measures of measuring the leverage of an airline company. At the end of 2014, JetBlue had a net debt plus operating leases to EBITDAR ratio of 3.13 as compared to Southwest Airlines at 1.4 and Spirit Airlines at 2.08.
As can be seen from the chart above, JBLU has had more debt than LUV and SAVE for the past three years. Regular debt payments, made possible by strong industry fundamentals that led to higher cash flows, have enabled the company to reduce its net debt plus operating leases to EBITDAR ratio. While SAVE’s ratio was lower than that of LUV in 2013, LUV inched ahead in 2013, indicating more efficient debt management.
The good news is that the ratio has been on a declining trend for all three carriers. The ratio for JBLU declined from 4.66 in 2012 to 3.13 in 2014. For Southwest, it declined from 2.5 in 2012 to 1.4 in 2014 and for SAVE it declined from 2.28 in 2012 to 2.08 in 2014.
JetBlue has generated ~$362 million CFO or cash flow from operations in 2Q15 and ~$890 million in 1H15. CFO increased by 65% for the quarter while free cash flow increased by 106%. This was made possible by the exceptional operational performance and also due to a lack of pension plan contributions.
Southwest Airlines generated $627 million in CFO in 2Q15 and $2079 million in 1H15. CFO decreased by 53% for the quarter while free cash flow decreased by 76%. SAVE made $129 million CFO in 2Q15 and $297 million in 1H15. CFO increased by 141% for the quarter. However, free cash flow decreased by 89%. In fact, SAVE’s free cash flow has been declining for the past three quarters ,indicating lower returns for investors.
To avoid the risk of investing in a single stock, investors can get exposure to airlines by investing in the iShares Transportation Average ETF (IYT), which invests ~2.5% of its holdings in LUV and 1.6% in JBLU.