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How Can JetBlue Airways’s Valuation Change after Its 2Q16 Earnings?

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Current valuation

On July 15, 2016, JetBlue Airways (JBLU) was valued at 4x its forward EV-to-EBITDA.[1. enterprise value to earnings before interest, tax, depreciation, and amortization] JetBlue’s valuation is slightly lower than its average of 6x.

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Peer comparison

JetBlue Airways (JBLU) is trading closer to legacy carrier Delta Air Lines, which trades at 4.1x. JBLU is trading higher than the other two legacy carriers, Alaska Air Group (ALK) and United Continental (UAL), which trade at 3.6x and 3.5x, respectively.

The remaining legacy carrier, American Airlines (AAL), trades at 5.6x. Among the regional carriers, Spirit Airlines (SAVE) was trading at 7.2x, Allegiant Travel (ALGT) was trading at 6.1x, and Southwest Airlines (LUV) was trading at 5.3x.

Valuation multiple driver

The forward EV-to-EBITDA ratio shows what investors are willing to pay for the next four quarters of estimated EBITDA. It incorporates investors’ expectations for the industry’s outlook like fears of overcapacity leading to price wars. It also tries to assess the airline’s response to these situations.

Some of the metrics used to measure this include the airline’s capacity growth and resulting capacity utilization, financial leverage compared to its peers, and airline margins—the PRASM–CASM spread.

Declining unit revenue and passenger yield are weighing on the stock’s valuation multiple. This can lead to lower revenue in the future, although JetBlue’s falling leverage has certainly helped.

In the long term, given that the airline industry is cyclical, industry fundamentals will also play an important role. For example, if fuel prices rise substantially and airlines are not able to pass them on to customers, margins will decline, adversely impacting valuation multiples.

Investors can gain exposure to airlines through the SPDR S&P Transportation ETF (XTN).

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