We recently compiled a list of the 10 Best Airline Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where JetBlue Airways Corporation (NASDAQ:JBLU) stands against the other airline stocks.
We also dive deep into trends in the commercial aviation industry, especially the impact the return of international travel to pre-pandemic levels has had on the airline industry.
The coronavirus pandemic wreaked havoc across the global airline industry. According to the International Air Transport Association (IATA), industry revenues slumped from $838 billion in 2019 to $384 billion a year later, registering a 54.1% downfall. However, the market has gradually recovered over the last few years and is on track for solid growth as international travel resumes worldwide.
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A report by UN Tourism in January this year stated that international tourism was recorded in 2023 at 88% of pre-pandemic levels, and is on track to return to levels before the coronavirus struck. The IATA anticipates global airline revenue to reach $996 billion in 2024, 19% higher than in 2019 and 1.5 times higher than the pandemic low of 2020.
The global travel recovery has been led by the Middle East, the strongest tourism market in 2023, as it welcomed 22% more travelers than it did in 2019, becoming the only region to prevail over pandemic levels. Europe reached 94% of the levels in 2019, while Africa stood at 96%. Asia Pacific has been rather slow, recovering only 65% of pre-pandemic levels as of last year.
The uptick in international travel is yielding solid returns this year. As of October 23, 2024, a major airline ETF issued by U.S. Global Investors has grown by 18.44% YTD, outperforming the broader market by 4.5%. Analysts at Forbes believe airline stocks are poised for strong growth during the second half of 2024 as fuel prices dip after long periods of price hikes. Fuel accounts for between 20-30% of airlines’ total costs. Moreover, airlines in the US are cutting down on excess domestic capacity after compressed margins during the summer season. The oversupply of seats has resulted in lower fares, and airline operators are determined to correct that. The deceleration of capacity, coupled with strong travel demand, will enhance their pricing power and improve earnings.
Hedge fund sentiment on airline stocks is also encouraging. Tony Bancroft from Gabelli Funds shared his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26. He noted a significant growth in aircraft orders, resulting in major aircraft manufacturers having a 12-year backlog of orders. Bancroft cited China as the primary catalyst driving robust demand.
According to the portfolio manager, the country represented 20% of all new aircraft orders as Chinese airlines strive to cater to the growing demand for travel among the middle class at home and in neighboring India. Bancroft also highlighted the rising middle class in the United States and other parts of the world that are increasing international travel, and contributing to the strength of the commercial aviation industry.
Methodology
We sampled stocks from ETFs with airline exposure and then picked the top 10 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A commercial jetliner at an airport gate with passengers waiting in the background.
JetBlue Airways Corporation (NASDAQ:JBLU)
Number of Hedge Fund Holders: 19
JetBlue Airways Corporation (NASDAQ:JBLU) is a major airline in the United States that operates over 1,000 daily flights across destinations in the US, Latin America, the Caribbean, and parts of Europe. It flies out of six main airports, with its primary hub at JFK International Airport in New York. With 19 hedge funds, from amongst the ones tracked by Insider Monkey, having investments in the company as of Q2 2024, JetBlue Airways Corporation is one of the best airline stocks to buy according to hedge funds.
The company’s share price has surged 10% since announcing its second-quarter results in July. In Q2, it generated net earnings of $25 million or $0.07 earnings per share under GAAP, beating Wall Street analysts’ expectations of a quarterly loss. Pre-tax income for the quarter stood at $34 million. JetBlue Airways credited these results to a strong performance in its premium product offerings and ongoing cost-saving programs aided by a drop in fuel prices.
In recent months, the airline has actively tried to reduce costs by cutting unprofitable routes amid challenges emanating from an oversupplied domestic market and increased expenses. So far this year, JetBlue Airways has closed 50 routes and has shifted focus to its core franchises, which have long been the profit engine for the company. These include New York, New England, Florida, Puerto Rico, and the Caribbean.
While measures that have contributed to the earnings in Q2 are encouraging, they are said to be not enough to ensure the company posts a profit for the full fiscal year. The company hasn’t posted an annual profit since before the pandemic. It has been grappling with engine issues with Pratt & Whitney’s GTF turbofans for quite some time, resulting in an increased number of grounded aircraft and bloating expenses associated with inspections.
During the Q2 earnings call, JetBlue Airways announced that it was deferring the delivery of 44 Airbus A321neo aircraft to 2030. This is the fleet most impacted by the Pratt & Whitney issue. This decision is expected to help the company reduce its capital expenditure by $3 billion through 2029, and improve cash flow.
Most of these initiatives will take time to ramp to their full potential, but the management is confident that its strategy (called JetForward) to enhance operational efficiencies, reduce costs, restructure routes, and simplify its fleet will start to pay dividends as early as next year. It expects to generate $800 – $900 million of incremental EBIT from 2025-2027 through these measures.
Overall JBLU ranks 9th on our list of the best airline stocks to buy according to hedge funds. While we acknowledge the potential of JBLU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than JBLU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.