JetBlue's Profit Growth Is Just Getting Started

JetBlue Airways reported another quarter of strong earnings growth this week. The carrier continues to post much better unit revenue growth than rivals, while keeping costs in check. As a result, adjusted EPS more than doubled year over year last quarter.

JetBlue's profit is soaring in 2015. Photo: JetBlue Airways

The most remarkable thing about JetBlue's recent performance is that the company hasn't even implemented most of the initiatives it laid out last fall as part of a plan to boost annual operating income by at least $450 million. Furthermore, many of JetBlue's profit improvement goals seem conservative. As a result, JetBlue has tons of room to keep growing earnings in the next few years.

JetBlue's planJetBlue laid out a three-pronged plan for profit growth at its 2014 investor day. The first lever for profit growth was the introduction of "Fare Options." This new system has allowed JetBlue to start charging for tickets that include a free checked bag. The annualized impact of this change is expected to exceed $200 million by the end of 2017.

A second lever is the addition of 15 seats to each of JetBlue's 130 A320 aircraft. JetBlue has stated that this will boost earnings by about $100 million annually when the project is completed in mid-late 2018.

Finally, JetBlue attributed a $150 million annualized impact to a variety of other ongoing projects. This included growing sales of its "Even More" extra legroom and expedited security options, rolling out the Mint premium service on a few key routes, implementing an improved co-brand credit card deal, selling more vacation packages, and monetizing JetBlue's new "Fly Fi" high-speed Internet.

Not much has happened yetJetBlue estimated last fall that it would capture $105 million of the $450 million profit growth opportunity in 2015. However, very little of that has happened so far.

JetBlue started selling its new Fare Options on the very last day of Q2. While it expects a $65 million benefit this year, that will come in the second half of the year: especially Q4.

Mint has had the biggest impact this year. It has been one of the key drivers of JetBlue's unit revenue growth -- and its performance has far exceeded JetBlue's expectations. But this also means that there is more upside than JetBlue previously estimated. In the coming year, JetBlue will add more Mint flights in New York and bring the service to Boston for the first time.

JetBlue has experienced huge demand for its Mint premium service. Photo: JetBlue Airways

JetBlue has also realized some benefits this year from boosting Even More sales and monetizing Fly Fi, but these gains are likely much smaller in scale.

The two top profit growth drivers are still to comeAs noted above, JetBlue has put together its stellar first-half performance without the revenue benefit of Fare Options, which went live at the end of June. On the company's recent earnings call, CEO Robin Hayes reiterated the target of getting at least $200 million in incremental annual earnings from Fare Options by the end of 2017. Most of that benefit will come in 2016.

The A320 cabin reconfiguration is also still to come. And the $100 million profit improvement guidance for this project seems very conservative. Even if the extra 15 seats on each plane get filled at a significant discount to JetBlue's current average fare, the extra costs are very modest. As a result, JetBlue's incremental profit from this project could ultimately reach nearly $200 million.

Finally, JetBlue's new credit card agreement could be more lucrative than previously anticipated. JetBlue's current co-branded credit card deal -- which expires at the end of 2015 -- dates from December 2009, a time when JetBlue was a weaker company with little bargaining leverage.

Recently, airline rewards programs have been in high demand among credit card issuers, allowing the airlines to extract much better terms. In the latest example of this trend, Southwest Airlines announced last week that it extended its credit card agreement (most recently modified in 2011). Under the new deal, it will get about $500 million in incremental revenue annually.

JetBlue is only a third the size of Southwest. As a smaller rewards program, it also may have less negotiating clout. But even if the impact is half as big proportionally (about $80 million annually), that appears to be a lot more than what is incorporated in JetBlue's guidance.

Many routes to profit growthThe bottom line for investors is that in spite of its strong profit growth year-to-date, JetBlue has huge earnings growth potential ahead of it. The company probably underestimated the earnings potential for several of its new initiatives. In total, I believe JetBlue's profit growth initiatives could deliver more than $600 million in incremental annual profit by 2019.

Less than 10% of that opportunity was reflected in JetBlue's first-half results. The remaining opportunity could add $1 or more to earnings per share. That's more than JetBlue earned in all of 2014, and it represents more than 50% earnings growth relative to the consensus 2015 EPS estimate of $1.84.

In addition to these discrete initiatives, JetBlue will continue to grow capacity at a high-single digit rate for the foreseeable future. And with free cash flow rising, it could start buying back stock more aggressively.

JetBlue is on pace to more than double EPS in 2015. Between its various profit improvement initiatives, capacity growth, and share buybacks, it could double EPS again by 2019 or 2020. With the stock trading for just 12.4 times projected 2015 earnings, that provides a whole lot of upside for long-term investors.

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Adam Levine-Weinberg is long January 2017 $17 calls on JetBlue Airways. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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