JetBlue: One Airline To Avoid (NASDAQ:JBLU)

JetBlue Airbus A321 JFK Airport New York in the United States

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The entire airline sector has been hit due to rising oil prices and fears of a recession, while airlines have raised debt levels due to COVID losses. Most stocks are so cheap that investors should charge anyway, though JetBlue Airways (NASDAQ: JBLU) is the only airline to be avoided now. The investment thesis is bearish in this value due to the large cash supply Spirit Airlines (DESA).

Fusion problems

The entire airline sector is under pressure due to fears that rising oil prices and a recession will prevent the payment of debt. Many companies in the sector accumulated large debt loads during the lean years of COVID and all hope was a booming travel demand in an economic reopening to provide cash flows to help these airlines pay off debt.

One of the great advantages of having JetBlue was the limited debt load. The airline only had a net debt balance of approximately $ 1.1 billion at the end of March, which left the airline with one of the best balance sheets in the industry. JetBlue has a total debt of $ 3.39 billion with a solid cash balance to offset most of the debt.

Data by YCharts

The problem with the offer to acquire Spirit Airlines is the cash nature of the deal. JetBlue wants to use cheap debt to make the deal worthwhile, but many investors would prefer the airline to avoid a larger debt burden, given that having limited debt was a big plus.

JetBlue only had to increase Spirit’s offer to $ 33.50 per share because the Board of Directors preferred a previous offer of Border Group (ULCC). The $ 2.00 per share bid price increase would require JetBlue to spend $ 3.7 billion in cash and a $ 7.5 billion business value when Spirit’s debt levels were included. The deal would increase the net JetBlue’s net debt to $ 6.6 billion. In addition, the airline would pay an accelerated advance payment of $ 1.50 per share.

In addition, the airline has agreed to pay $ 350 million in a reverse rupture fare, if management is unable to obtain regulatory approval. JetBlue has a lot to lose and little to gain with a merger where the company accumulates debt.

JetBlue is proposing to proactively offer the U.S. Department of Justice a divestment of all of Spirit’s assets in the New York and Boston market and reduce the gates and assets in Fort Lauderdale. The divestment of many key assets reduces the value of the deal.

Regulatory slide

Source: JetBlue presentation on May 16th

The main saving grace for JetBlue shareholders is that Spirit has not accepted a deal with the preference for the Frontier combination. For now, Spirit’s management team is in favor of the business combination that offers more long-term value compared to the quick gains of a cash withdrawal with JetBlue.

Get away

The market has a clear preference for JetBlue to move away from the deal. Shares have fallen more than 40% YTD while Frontier Group has only fallen 28% y Southwest Airlines (LUV) has only fallen by 17%. The airline industry has definitely struggled with the weak stock market, but JetBlue will likely appear when the offer for Spirit is canceled.

Data by YCharts

Frontier’s offering does not have the same regulatory risk and the offer is mostly in shares. The low-cost carrier does not assume additional debt to pay the deal, which makes the offer higher than those shareholders where the combination offers synergies to make a better airline to compete with the big four.

JetBlue must incur substantial debt to complete this agreement. Shareholders are taking additional risks in order to produce possible additional returns with the Spirit business combined.

The market questions whether JetBlue can meet the EPS targets of almost $ 2 in 2024. The shares are trading at only 7 times the current 2023 targets, making JetBlue clearly cheap just by meeting the targets without the additional risk of debt. of Spirit.

Data by YCharts

In essence, shareholders have an easy path to a solid return on shares just by executing current plans. Collecting a lot of debt by paying Spirit while assuming that the low-cost operator’s debt is not ideal and the stock price reflects that scenario.

Take away

The key conclusion of investors is that a move by JetBlue to end the search for Spirit Airlines would be a buy signal. Otherwise, investors should avoid these actions with the plan of securing a large debt position while engaging in a lengthy regulatory battle to try to create the fifth largest airline.

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