JetBlue Flies in Neutral Route

We are maintaining our Neutral recommendation on JetBlue Airways (JBLU - Analyst Report) — a low-cost passenger airline. The company is characterized by a cost-efficient business model, expansion of operations and beneficial partnerships. However, rising fuel price, competitive threats and the ongoing global economic instabilities might limit the upside potential of the stock.

For the three month period from July to September, JetBlue performed impressively and posted earnings per share ahead of our expectation. Revenue also stood in line with the Zacks Consensus Estimate. The results were buoyed by substantial contribution from certain regional units coupled with improved operational efficiency.

Looking ahead, we expect JetBlue to continue benefiting from growing travel demand, schedule optimization, disposal or replacement of old aircraft, managed capital expenditures and disciplined growth. The company is also making continued progress in expanding its product and service offerings on board and on the ground to aid growth in ancillary revenues and enhance ticket pricing flexibility.

JetBlue continues to successfully expand its network footprint in two major regions — Boston, and the Caribbean and Latin America. For 2013, the company expects the Boston market to drive its growth momentum through the alliance with Massport that would provide additional infrastructural facilities. We believe optimizing schedule across networks enhances JetBlue’s growth and strengthens its network than other industry players such as United Continental Holdings Inc. (UAL - Analyst Report) and Delta Air Lines Inc. (DAL - Analyst Report).

Additionally, JetBlue is effectively managing its fuel hedge portfolio to endure surging fuel prices and the ongoing market turmoil. The company has hedged approximately 27% of its projected fuel requirements for both the fourth quarter and fiscal 2012 using a combination of collars, crude call options and jet fuel swaps.

Nevertheless, operating within the airline industry, JetBlue remains exposed to the effects of fuel price volatility, which remains one of the major challenging factors. The company's ability to pass on the increased cost of fuel to its customers is limited by the competitive nature of the airline industry. Thus, even a small change in fuel prices can significantly affect profitability.

The domestic airline industry is under pressure due to low profit margins, high fixed expense and significant price competition. JetBlue Airways faces significant opposition with respect to routes, services, fares, flight schedules, types of aircraft, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs.

Hence, we do not see any near-term strong driving catalyst for the company that currently holds a Zacks # 3 Rank (short-term Hold rating).