On January 20, 2017, JetBlue Airways (JBLU) was valued at 5.4x its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization). JetBlue’s valuation is slightly lower than the industry average of 7.3x.
On January 20, 2017, American Airlines (AAL) was trading at 5.9x, United Continental (UAL) at 6.1x, Delta Air Lines (DAL) at 5.5x, Southwest Airlines (LUV) at 6.2x, Alaska Air Group (ALK) at 5.6x, Spirit Airlines (SAVE) at 6.3x, and Allegiant Air (ALGT) at 6.8x.
The market expects DAL to record EBITDA growth of -0.4% per share in the next year. AAL’s EBITDA growth is expected to be 0.1%, UAL’s to be -4%, ALK’s to be 13%, LUV’s to be -1.5%, JBLU’s to be -2.7%, SAVE’s to be 11.5%, and ALGT’s to be 0.7%.
Valuation multiple drivers
The forward EV-to-EBITDA ratio shows what investors are willing to pay for the next four quarters of a company’s estimated EBITDA. It incorporates investors’ expectations for the industry’s outlook, such as fears of overcapacity leading to price wars. The ratio also tries to assess airlines’ responses to these situations.
Some of the metrics used to measure these responses include airlines’ capacity growths and resulting capacity utilizations, their financial leverages compared to their peers, and their margins—the PRASM-CASM (passenger revenue per available seat mile to cost per available seat mile) spread.
Falling unit revenue and passenger yields are weighing on JetBlue’s valuation multiples. These falling yields could lead to lower revenue for the company going forward. However, Jet Blue’s falling leverage has certainly helped it out.
In the long term, given that the airline industry is cyclical, industry fundamentals will also play important roles in airline companies’ successes or failures. For example, if fuel prices rise substantially and airlines aren’t able to pass the costs on to customers, margins will fall, adversely impacting valuation multiples.
Investors can gain exposure to airlines through the SPDR S&P Transportation ETF (XTN).