Goldman: JetBlue Shares Could Fly Higher

Citing JetBlue's new routes and revenue diversity, Goldman Sachs issues a bullish outlook that sends the discount carrier's stock flying

A day after nasty winter weather in the Northeast snarled operations at JetBlue Airways' largest hub, company shares jumped on a positive report from Goldman Sachs Group (GS).

Valentine's Day turned into a major flying hassle for airlines in the Northeast, with few bearing the operational brunt as severely as JetBlue (JBLU), which had planes stuck on the tarmac in New York for hours, stranding passengers. The company canceled more than half its 500 daily flights because of the snow and ice. The airline said Feb. 15 that it would offer some passengers refunds and free flights to make amends for the service troubles, the Associated Press reported.

Still, despite the airline industry's perpetual threats of costly fuel and uncertainty in the general state of economic affairs, Goldman analyst Robert Barry says the discount carrier is poised to profit from new routes and added flexibility it will derive from a new generation of Embraer (ERJ) aircraft JetBlue is buying. Barry lifted his view on shares of the airline to buy from neutral.

"We see several (profit) margin growth drivers," Barry wrote in a research note dated Feb. 14. JetBlue shares rose 4.5% to $13.82 in midday trading Feb. 15 on the Nasdaq.

At the same time, Goldman Sachs downgraded shares of American Airlines' parent AMR Corp. (AMR) from buy to neutral, citing a high valuation. The stock has been trading near its 52-week high of $41. AMR shares were down about 1% to $38.13 in midday trading on the New York Stock Exchange.

JetBlue, which is based near its biggest hub at JFK International Airport, has been adding to its fleet rapidly. The airline recently began flying new 100-seat Embraer 190 aircraft, and expects to receive about 18 new E190s each year through 2011. The E190s feature larger windows and seats arranged in a two-by-two layout, eliminating middle seats. Barry also thinks JetBlue will be able to benefit soon by commanding higher fares on its new international routes and can build greater customer loyalty to the brand.

Meanwhile, the airline has been expanding rapidly. Since beginning service in 2000 with just a handful of routes between New York's JFK airport and cities like Fort Lauderdale, Fla., Buffalo, N.Y., and Orlando, JetBlue now flies to 50 cities. Last year alone, it embarked on new nonstop service to international tourist destinations like Aruba, Cancun, and Bermuda. As JetBlue's new markets mature, it will likely derive greater income, Barry noted.

Goldman Sachs isn't alone in its opinion of JetBlue. Billionaire investor George Soros owned nearly 17 million of the company's shares as of Dec. 31, or nearly 10% of the total, according to a Securities and Exchange Commission filing on Feb. 14. Morgan Stanley (MS) started covering JetBlue at overweight in June, noting that the former industry darling is "no turnaround story" (see, 6/20/2006, "Morgan Stanley Starts JetBlue at Overweight.")

The San Francisco research firm StarMine says that seven analysts have rated the stock at hold, seven at buy, one at strong buy, and two at sell. But none of the firms StarMine tracks rates the company as a "strong sell."

(Goldman Sachs does business with the companies covered in its research reports, but Barry certifies that his compensation is not related to views expressed in the report.)

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