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Bear of the Day: JetBlue (JBLU)

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JetBlue Airways Corporation (JBLU - Free Report) is getting hit by rising costs. This Zacks Rank #5 (Strong Sell) is expected to see a double digit decline in earnings in 2018.

JetBlue operates a a low-cost airline with its main hub being New York. It is also a leading carrier in Boston, Fort Lauderdale-Hollywood, Los Angeles (Long Beach), Orlando, and San Juan. JetBlue carries more than 40 million customers a year to 102 cities in the U.S., Caribbean, and Latin America with an average of 1,000 daily flights.

Ratified Its First Ever Pilot Contract

On July 27, JetBlue ratified its first ever pilot contract with the Air Line Pilots union.

It's a 4-year contract. Negotiations began all the way back in 2015.

These negotiations have been an overhang on the stock as there was a level of uncertainty regarding costs and the outcome for several years. That's now been removed. Analysts and investors can model the costs of the new pay rates and other provisions.

Higher Fuel Costs Spook Investors

On July 24, JetBlue announced second quarter results and beat the Zacks Consensus by 2 cents, earnings were $0.38 versus the consensus of $0.36.

However second quarter revenue per available seat mile (RASM) fell 1.2% year over year, mostly due to the negative impact of holiday travel that shifted into the first quarter.

All the airlines are dealing with the increase in fuel prices.

The realized fuel price in the quarter was $2.28, up 41.7% from the first quarter of 2017 when it was $1.61.

It's hedging about 7% of its fuel consumption for the third quarter and expects to have an average price per gallon of $2.33 in the quarter.

Capacity is expected to jump between 7.5% and 9.5% year-over-year in the third quarter.

For the third quarter, RASM growth is forecast to range between flat and 3% year-over-year.

Estimates Cut

While the pilot contract was seen as a positive by analysts, there's still a lot of uncertainty about the near term.

The analysts have cut full year estimates since the report.

9 have been cut in the last 30 days pushing the Zacks Consensus Estimate down to $1.49 from $1.62. It made $1.71 in 2017 so that's a decline of 12.9%.

Analysts were also bearish on 2019 as 10 estimates were cut for that year in the last month as well. The 2019 Zacks Consensus has fallen to $1.79 from $2.00, but that's still a gain of 20% versus 2018.

Shares Oversold?

Investors didn't like what they hear on the earnings report. The shares have tumbled 17.3% year-to-date.

They're cheap, though, with a forward P/E of 12.3.

If you don't want to wait for the estimates to improve, you can always invest in the only current Zacks #1 (Strong Buy) airline. That would be SkyWest, Inc. (SKYW - Free Report) . Earnings are expected to be up 44% in 2018.

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