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Why JetBlue Expects Higher Unit Costs in 2Q17

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Operational costs rise

For the first quarter of the year, JetBlue Airways’ (JBLU) operating expenses, excluding fuel and profit sharing, rose 3.3% to 8.35 cents. This rise was consistent with JetBlue’s guidance of a 3%–5% rise in costs.

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Fuel costs rose too

Crude prices have been recovering and, as a result, airline fuel costs have been rising. JBLU’s total fuel expense for 1Q17 rose 50% YoY in 1Q17 to $323 million. Fuel price per gallon rose 44% YoY to $1.69 per gallon.

Outlook

JetBlue has to cope with a double whammy to its cost structure with both fuel prices and labor costs increasing. JetBlue expects fuel costs to rise to $1.73 per gallon compared to $1.43 in 2Q16, a 21% YoY increase.

Also, cost per available seat mile, excluding fuel, or CASM ex-fuel and ex–profit sharing is expected to rise 4.5%–6.5% in 2Q17. For 2016 as a whole, CASM ex-fuel and ex–profit sharing is expected to rise 1.5% to 3.5%, similar to the guidance from February 2017.

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JetBlue has, however, realized the need to cut costs. It has appointed a new CFO, Steve Priest. His first task will be to reduce JetBlue’s costs. Priest said, “JetBlue has a strong foundation and I’m excited by the opportunities in front of us to build an even stronger company for our customers, crewmembers, and owners. My priority is helping to achieve a cost structure that leverages the full benefit of our scale and strong balance sheet.”

Investors can gain exposure to airlines by investing in the SPDR S&P Transportation ETF (XTN), which invests ~3% of its holdings in Southwest Airlines (LUV) and Alaska Airlines (ALK), 2.8% in Allegiant Travel (ALGT), 2.7% in United Continental (UAL), 2.7% in American Airlines (AAL), and 2.7% in Delta Air Lines (DAL).

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