Airline Shares' Descent Could Mean Bargains

JetBlue (JBLU - Cramer's Take - Stockpickr) shares fell 16.6% on Friday, after the low-cost carrier warned fourth-quarter margins would be narrower than previously thought. Many analysts saw the pullback as a buying opportunity.

On Thursday night, JetBlue told investors that fourth-quarter operating margins would come in between 13% and 14%, down from the 19.7% posted in a seasonally strong third quarter and lower than the 16.8% margins it had a year ago. As the economy recovers, competition is increasing as network carriers add back capacity, hurting the industry's overall pricing power.

"We're faced with a challenging revenue environment due to capacity additions resulting in lower average fares, particularly in our western markets," said David Neeleman, JetBlue's chairman and CEO, in a statement. "This, coupled with the ongoing maturation of our newer markets and depressed traffic to southern California earlier this quarter, has caused us to revise our margin guidance."

While JetBlue said it still anticipates a "very solid fourth-quarter performance," analysts were nonplussed, moving to reduce their earnings estimates, valuation multiples and target prices. Some warned that network carriers were adding back capacity too fast. To stay competitive, JetBlue has been cutting ticket prices and sacrificing its own profit margins.

"Increased competition from major carriers is also having an adverse influence on JetBlue's revenue productions, notably Delta's (DAL - Cramer's Take - Stockpickr) Song in the Northeast/Florida and American/United from New York to the West Coast," said Michael Linenberg, airline analyst at Merrill Lynch, in a research note.

As evidence, Linenberg cited airfare prices between Fort Lauderdale and the Los Angeles area, a market where JetBlue competes head-to-head with Song, which offers flights for as low as $109 one-way to Los Angeles. While JetBlue flies to nearby Long Beach for $99 one way, such fares are extremely low and JetBlue is reducing its service, flying just one 156-seat A320 a day starting in January. "As these types of fares enter the market, JetBlue's revenue is almost certain to come under pressure," noted Linenberg.