JetBlue Airways Corporation (JBLU), US Airways Group, Inc. (LCC): Two Airliners for the Long Haul

American airline firms have had several difficult years, and as a sector there is a lot of uncertainty about the future. This article will briefly analyze the general sector landscape and compare a few of the main carriers. I’m bullish about JetBlue Airways Corporation (NASDAQ:JBLU) and possibly US Airways Group, Inc. (NYSE:LCC), although the merger with AMR adds additional uncertainty. I don’t view Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL) as great investments.

JetBlue Airways Corporation (NASDAQ:JBLU)JetBlue Airways Corporation (NASDAQ:JBLU) had a tough second quarter. Passenger revenue per average seat mile (PRASM) declined by about 3.3% compared to the second quarter of 2012. JetBlue anticipates year-over-year PRASM growth of around 4% for July, so there are some opportunities to regain some of the losses from this quarter.

The profit margin declined by 2.6% on a 7.5% surge in expenses related to accelerated maintenance on the Embraer E190 jet engines. Management is working to contain the problem by entering into a long-term agreement with GE for maintenance, but these costs will remain substantial as JetBlue Airways Corporation (NASDAQ:JBLU) completes repairs and overhauls.

Fortunately, ancillary revenue per customer increased 4%, driven by increased usage of the TrueBlue and Even More programs. TrueBlue is JetBlue Airways Corporation (NASDAQ:JBLU)’s frequent-flyer rewards program; with Even More, passengers can pay a little extra for some extra legroom and the ability to get to the overhead bins first. Overall, management anticipates ancillary revenue to achieve a 15% gain year-over-year for 2013.

Laps competitors

Even with the earlier-mentioned margin decline, JetBlue Airways Corporation (NASDAQ:JBLU) laps the competition with an operating margin of 6.8% for the trailing-12 months–better than Delta Air Lines, Inc. (NYSE:DAL) at 5.5% and United Continental Holdings Inc (NYSE:UAL) at -1.5%. In all fairness to Delta, management is very bullish on the company’s third quarter and is predicting an operating margin of 11% to 13%, so there may be some short-term opportunities there. Long-term, however, United and Delta are both just too big–and too in debt–to respond as nimbly as JetBlue to potential opportunities.

Delta is sitting on over $10 billion in debt, while United has over $12 billion in debt. JetBlue, by contrast, has a little less than $3 billion: still a lot, but it accounts for a lower debt/equity ratio (about 1.2) than the others (United’s is about 9.0; Delta has negative shareholder equity, so the ratio cannot be calculated.) The ability to take on additional leverage gives JetBlue better growth prospects.

Management is emphasizing code-sharing agreements with other airlines in its business strategy. Recently, JetBlue signed a bilateral code-share with South African Airways, which now leaves the carrier with 24 code-share agreements. For a smaller carrier like JetBlue, code-shares (which result in seats marketed by one airline while the actual plane is operated by a different carrier) enable greater market exposure and more clients.

These growth strategies will pay dividends over the long term. JetBlue’s position as best-in-class for customer service (its ninth year winning the award) also hasn’t hurt. Along with the aforementioned customer-rewards programs, the high satisfaction rating is helping the airline maintain and grow its customer base.