Term Project
Term Project
Comparative Financial Statement Analysis of Spirit Airlines and Jet Blue, 2015-2017
ACC 770- Managerial Accounting
I. Introduction
II. Business History and Future
a. Industry
b. Spirit Airline
c. JetBlue
III. Financial Analysis
a. Ratio analysis explanation
i. Liquidity ratios
ii. Activity Ratio
iii. Solvency Ratio
iv. Profitability Ratio
b. Horizontal and Vertical Analysis
i. Overview
ii. Complementary application
IV. Liquidity Analysis
a. Industry
b. Spirit Airlines
c. JetBlue
V. Activity Analysis
a. Industry
b. Spirit Airlines
c. JetBlue
VI. Solvency Analysis
a. Industry
b. Spirit Airlines
c. JetBlue
VII. Profitability Analysis
a. Industry
b. Spirit Airlines
c. JetBlue
VIII. Horizontal and Vertical Analysis
IX. Comparative Analysis
a. Creditworthiness analysis
i. Short-term
ii. Long-term
b. Investment attractiveness
c. Recommendations
X. Summary and conclusions
XI. References/ Bibliography
XI. Appendices
Introduction:
The report is the partial requirement of Managerial Accounting course. The objective is analyzing and comparing two companies of same industry for the purpose of forming sensible decision bases on financial statements, historical data and market news about its standing.
The report has analyzed and compared Spirit airline and JetBlue Airline. The scope of the report is to see the trends of industry thereby, analyze companies position in terms of industry. Moreover, past analysis also provide an assistance in forming recommendations and insight of the particular company.
The methodology of entire report is mainly on ratio calculations and its interpretations. Then it provides brief summary of evaluating short term and long term creditworthiness along with the investment attractiveness.
The future of airline industry is slightly unpredictable for the perspective of investment, because demand for air tickets is increasing but demand for stocks has decreased overtime.
Business History, Overview and Future
Industry History and Overview:
Since the birth of flight in 1903, air travel has emerged as a crucial means of transportation for people, products and animals. The hundred-plus years following the invention of the first aircraft have brought about a revolution in the way people travel. The airline business is a major industry, relied upon by millions not only for transportation but also as a way of making a living.
In early years, flying was considered a risk endeavor. In 1925, a development of an act “Air Mail Act” bring much revolution in airline industry by allowing the postmaster to contract with private airlines to deliver mail. Shortly thereafter, the Air Commerce Act gave the Secretary of Commerce power to establish airways, certify aircraft, license pilots, and issue and enforce air traffic regulations. The first commercial airlines included Pan American, Western Air Express and Ford Transport Service. Within 10 years, many modern-day airlines, had emerged as major players.
In 1938, Civil Aeronautics Board, commonly called CAB was established. This board served numerous functions, the two most significant being determining airlines' routes of travel and regulating prices for passenger fares. And further in 1958, the Federal Aviation Agency came in to being, now known as the Federal Aviation Administration (FAA), to manage safety operations, and resulting disbandment of CAB as FAA took control of its operations and now evolved with numerous functions in current era. Such as, aircraft and airmen safety and certifications along with providing repair stations, airport compliances, air traffic control and airmen and aircraft trainings and testing.
Airline Industry is benefiting from growing income level in the country, allowing people to fly to their destinations in short span of time. Growth in tourism is also a major strength for the industry resulting increase in number of domestic and international air travelling.
Air travel has continued to grow over time and is one of those industries that are far away from reaching their peak. This can be partly attributed to the ever growing population and the increase in the propensity of people to fly. Another major advantage of the industry is low cost growing airlines can also share similar strengths with big brand names in this industry such as safety and speed, both main attributions can easily apply to both players of the industry. Airline staff consists of highly trained personnel, which is a major strength, to any organization in the industry.
Despite of the strengths, Airline industry facing mountain of problems as well. In past “9/11” impacted the industry with substantial decreased in travel business. The event greatly magnified the airlines’ issues, leading to a sharp decline in customers and significantly higher operating costs. Losses continued for years; the industry as a whole didn't return to profitability until 2006. A relatively stable period followed, although controversies arose over service quality and passenger treatment in terms of flight delays, particularly those involving planes waiting on the runway. In 2010 and 2011, the U.S. Department of Transportation issued a series of rules mandating that the airlines provide adequate modifications for passengers in extenuating circumstances. As a result, airline industry showed much improvement in safety and speed and now overall, air travel has marked safety record and has generally accepted as a safe and fast way to travel.
Other problems that industry is facing such as pilot shortages, too much congestion in skies because of too many airplanes travelling at same time, environmental issue like toxic smoke or odors from plan’s engine, dramatic increase in animal related incidents, high operation cost, climate challenges like Hurricanes, passengers’ comfort and health issues (transfer of communicable diseases) and etc.
Industry Future:
One can predict an innovative future in the industry in terms of more customized air travel, comfort, privacy and fastest mode of travel with more airports and runways. Future seems to be more demanding however, experts predicting war on resources. For example, on fuel prices and exchanges.
Several aircraft manufacturers, including Airbus, Boeing, Bombardier and Embraer, estimate the future demand for air transport in the form of revenues. The most recent estimates suggest that demand for air transport will increase by an average of 4.3% per annum over the next 20 years. That implies that demand for air travel will increase by a factor of 2.3 over the period. If this growth path is achieved, then in 2036 the air transport industry will contribute 15.5 million direct jobs and $1.5 trillion of GDP to the world economy.
History and Overview:
The company was founded in 1964 as Clipper Trucking Company in Michigan, and in 1974 changed its name to Ground Air Transfer, Inc. In 1983, the company started doing business as Charter One, a Detroit-based charter tour operator providing travel packages to entertainment destinations such as Atlantic City, Las Vegas and the Bahamas. In 1992, Charter One changed its name to Spirit Airlines, brought jet equipment into the fleet, and thereafter began adding scheduled passenger service to destinations such as Fort Lauderdale, Detroit, Myrtle Beach, Los Angeles and New York. Spirit relocated its headquarters to Miramar, Florida in December 1999. Expansion continued with the addition of the Chicago market, as well as coast-to-coast service to Los Angeles. In November 2001, Spirit inaugurated service to San Juan, Puerto Rico and implemented a fully-integrated Spanish language customer service plan, including a website and dedicated reservation line. May and June 2002 brought new service to Las Vegas, as well as expanded service in nearly every market. Fall of 2003 brought Spirit to Washington, DC’s Reagan National Airport and Cancun, Mexico. In fall 2004, Spirit introduced service to Santo Domingo, Dominican Republic.
Transition to Low-Cost Carrier and Ultra Low Cost Carrier Investment funds managed by Oak tree gained control of Spirit after making investments in 2004 and 2005 bringing a change in business strategy and positioning of Spirit as a low-cost carrier with a focus on expanding Caribbean and Latin American routes. Several unprofitable domestic routes were closed and Fort Lauderdale-Hollywood International Airport was established as Spirit’s main base of operations. In 2006, Indigo acquired a majority stake in the airline, and Spirit began implementing its Ultra Low Cost Carrier (ULCC) business model and further expanded its Caribbean and Latin American routes.
From 2005 – 2011, Spirit kept added new flights and this period is full of expansion to Bahamas, Jamaica and US Virgin Islands to Puerto Rica. In 2009, Spirit added Santiago, Dominican Republic, and Medellin and Armenia, Colombia, to its route map, along with new service from Fort Lauderdale to both Los Angeles and Las Vegas, as well as additional service in existing markets. Expansion in existing markets continued in 2010 along with new service to Barranquilla, Colombia.
The company operates approximately 450 daily flights to 60 destinations in the United States, the Caribbean, and Latin America. As of December 31, 2017, the company had a fleet of 112 Airbus single-aisle aircraft comprising 31 A319s, 51 A320ceos, 5 A320neos, and 25 A321ceos.
Their ULCC business model provides customers very low, unbundled base fares with a range of optional services, allowing customers the freedom to choose only the options they value. The success of the model is driven by our low cost structure, which permits them to offer very low base fares while maintaining one of the highest profit margins in the industry. They aggressively use low fares to stimulate air travel demand in order to increase passenger volume. Company strive to be recognized by our customers and potential customers as the low-fare leader in the markets we serve.
Future of Spirit Airlines
The two things that stand out most about Spirit Airlines are its low fares and high number of complaints. Spirit has improved on time performance and cut its complaint rate by more than half in last few years, and continue to strive for in future.
According to their leadership, they will grow capacity from 4% to 6% over the next three years and their goal is to have 80% of flights arrive on time in next two years. They also report expected operating cost raise due to new pilot contract from $85 million to $90 million annually, which reduces earnings per share by about a dollar.
JetBlue:
Brief History and Overview:
The JetBlue Airways Corporation is a low-cost airline that was founded by Utah entrepreneur David Neeleman. JetBlue’s corporate headquarters is located in Forest Hills, New York and the airline’s main hub is based on JFK airport in New York City. In the airline’s early years, it was considered to be one of the fastest growing airlines within the U.S. market. JetBlue was incorporated on August 24, 1998 and its operations commenced in early 2000. Originally, the corporation was known as New Air but in July of 1999 it changed the corporation’s name to JetBlue Airways. From the airline’s first flight, it has been able to “cater to the niche market comprising of customers that it defines as ‘underserved customers’—those looking for better features and benefits that aren’t provided by low-cost carriers and at a reasonable price that aren’t provided by network carriers”
JetBlue started with two newly leased Airbus with its first route from New York to Fort Lauderdale, Florida. Within six months, company began service to Buffalo. And in a year they grew rapidly, had 300 call centers with the option of employees working at home saved company’s overhead cost with big margin.
In December 2000, JetBlue announced millionth customers and third profitable month. This was considered an amazing achievement in a short period of time in airline businesses because, this was the time when start up national airlines were forced to file bankruptcy due to rising fuel prices. It reported about $100 million in revenues but no annual profit yet. By this time, the company was flying to ten destinations. In February 2001, JetBlue filled a higher percentage of its seats (79.9 percent) than any other U.S. carrier. Further, the "JetBlue" effect was credited with lower fares and increasing service at other airlines operating in New York.
By June 2001, it was operating a fleet of 14 planes with 76 flights a day. It further planned to acquire a new plane every five weeks until 2008. However, Airbus was unable to deliver enough new planes in time, Jet Blue announced plan to buy as many as 48 planes for as much as $2.5 billion from Paris Air Show in June 2001. At the time, the company had another 68 planes already on order and 15 in service.
The company was touted as the first airline launched from scratch in the computer age. Pilots received laptop computers. A "telemedicine" service was introduced, allowing in-flight consultation with physicians. They are first among in airlines, which aired taped shows, launched with joint venture between Harris corporation and Sextant in-flight systems. Their in-flight entertainment system boasted 24 channels of live satellite television broadcast at every seat.
In June 2014, JetBlue introduced Mint, first premium-class option, on flights from New York to Los Angeles and San Francisco operated with Airbus A321-200 aircraft outfitted with 16 lie-flat seats, four of which are suites. With Mint, JetBlue introduced an alternative to outdated business class offerings.
In November 2015, JetBlue expanded its highly successful Mint service on flights to the Caribbean, from New York (JFK) to Aurba and Barbados, two of its most popular Caribbean routes. It continued to expand with mint new routes between New York and Grenada and between Boston and Aruba.
Jet blue become the first airline to resume commercial flights to Cuba after more than 55 years of air travel to Cuba limited to charter services. JetBlue had fled the first regularly scheduled flight from US to Cuba, left footprint for other national carriers. The low- cost carrier was one of ten U.S. airlines that received tentative approval from America’s Department of Transportation (DoT) to launch Cuban services. The two former Cold War enemies restored diplomatic ties 2016.
Future of JetBlue:
JetBlue is facing decline in its share return since last three years continuously, is now looking to boost earnings by expanding in three key cities and plan to sell more travel services such as car rentals and hotels.
They announced a plan on Oct 2018 to broaden their revenue. This initiative would result in earnings per share of as much as $3 in 2020, that would top the $2.21 average of analysts’ estimates compiled by Bloomberg. Company is targeting a net operating profit margin of 10 percent in 2020, up from 7.3 percent this year, and a return on invested capital of as much as 13 percent compared with 8.2 percent. JetBlue said it has achieved $171 million of savings under a previously announced program to reduce structural costs by $250 million to $300 million by 2020.
Financial Statements and Analysis
|
SPIRIT AIRLINE - Ratios |
|||||
|
Liquidity |
12/31/2017 |
12/31/2016 |
12/31/2015 |
12/31/2014 |
|
|
Current |
Current Asset Current Liability |
1.98 |
1.83 |
2.20 |
1.97 |
|
Quick |
Current Assets - Inventory Current liability |
1.98 |
1.83 |
2.2 |
1.97 |
|
Asset Management/ Activity Ratio |
|
|
|
|
|
|
Average collection period |
Average Net Account Receivable One day Sales |
16.43 |
12.60 |
5.91 |
4.81 |
|
Inventory turnover |
Cost of goods sold Average inventory |
N/A |
N/A |
N/A |
N/A |
|
Account Receivable Turn over |
Net Credit Sales Average net Account Receivables |
22.22 |
56.45 |
75.76 |
85.15 |
|
Financial Leverage |
|
|
|
|
|
|
Debt |
Total Liabilities Total Assets |
0.57 |
0.56 |
0.52 |
0.37 |
|
Times interest earned |
EBIT Interest Expense |
9.32 |
17.05 |
57.92 |
40.58 |
|
Profitability |
|
|
|
|
|
|
Return on Net Sales |
Net Income Net Sales |
0.16 |
0.11 |
0.15 |
0.12 |
|
Return on Assets |
Net Income + interest Expense Average total Assets |
0.11 |
0.09 |
0.13 |
0.15 |
|
Return on stockholders' common equity |
Net Income - Preferred dividend Average common shareholders' equity |
60086.57 |
37839.86 |
45317.14 |
32209.14 |
|
Earnings Per Share of common Stock |
Net Income - Preferred dividend Numbers of shares of common stock outstanding |
6.06 |
3.76 |
4.38 |
3.08 |
|
Market-based/ Investment |
Dated 12/31/2017 |
12/31/2016 |
12/31/2015 |
12/31/2014 |
|
|
Price-to earnings |
Market Price per share of common Stock Earnings per share |
7.38 |
15.39 |
9.1 |
24.7 |
|
Dividend Yield |
Dividend per share of common (or preferred) stock market Price per Share |
No Dividend |
N/A |
N/A |
N/A |
|
Book Value per share of common Stock |
Total Shareholders' equity - Preferred Equity Number of shares of common stock outstanding |
26.06 |
20.12 |
17.13 |
13.78 |
|
JETBLUE Ratios |
|||||
|
Liquidity |
12/31/2017 |
12/31/2016 |
12/31/2015 |
12/31/2014 |
|
|
Current |
Current Asset Current Liability |
0.50 |
0.63 |
0.60 |
0.62 |
|
Quick |
Current Assets - Inventory Current liability |
0.48 |
0.61 |
0.58 |
0.60 |
|
Asset Management/ Activity Ratio |
|
|
|
|
|
|
Day's sales in receivable |
Average Net Account Receivable One day Sales |
12.75 |
11.48 |
8.76 |
8.53 |
|
Inventory turnover |
Cost of good sold Average inventory |
79.44 |
74.55 |
84.44 |
90.42 |
|
Assets Turnover |
Sales Average Net Assets |
0.72 |
0.71 |
0.74 |
0.74 |
|
Account Receivable Turn over |
Net Credit Sales Average net Account Receivables |
28.63 |
31.81 |
41.66 |
42.77 |
|
Financial Leverage |
|
|
|
|
|
|
Debt |
Total Liabilities Total Assets |
0.51 |
0.57 |
0.63 |
0.68 |
|
Times interest earned |
EBIT Interest Expense |
11.76 |
12.74 |
9.96 |
3.79 |
|
Profitability |
|
|
|
|
|
|
Return on Net Sales |
Net Income Net Sales |
0.16 |
0.11 |
0.11 |
0.07 |
|
Return on total Assets |
Net Income + interest Expense Average total Assets |
0.13 |
0.09 |
0.09 |
0.06 |
|
Return on stockholders' common equity |
Net Income - Preferred dividend Average common shareholders' equity |
286.75 |
189.75 |
169.25 |
100.25 |
|
Earnings Per Share of common Stock |
Net Income - Preferred dividend Numbers of shares of common stock outstanding |
2.08 |
2.22 |
1.98 |
1.19 |
|
Market-based/ Investment |
Dated 12/31/2017 |
12/31/2016 |
12/31/2015 |
12/31/2014 |
|
|
Price-to earnings |
Market Price per share of common Stock Earnings per share |
6.35 |
10.19 |
11.44 |
13.33 |
|
Dividend Yield |
Dividend per share of common (or preferred) stock market Price per Share |
No Dividend |
N/A |
N/A |
N/A |
|
Book Value per share of common Stock |
Total Shareholders' equity - Preferred Equity Number of shares of common stock outstanding |
15.06 |
11.91 |
9.97 |
8.16 |
Financial Analysis
Liquidity Analysis |
||||
|
|
|
|
|
|
|
Current Ratio |
2014 |
2015 |
2016 |
2017 |
|
Spirit airline |
1.97 |
2.20 |
1.83 |
1.98 |
|
JetBlue |
0.62 |
0.60 |
0.63 |
0.50 |
|
Industry |
1.6 |
1.5 |
1.6 |
1.5 |
Current Ratio: It measures the ability to pay current liabilities with its current assets. Spirit Airline’s current ratio is above average than industry ratio showing positive sign in terms of meeting current liabilities. Spirit Airline has more ability to meet its current liabilities than JetBlue. In addition, Spirit Airline performance for its current ratio has increased in 2017 as compare to 2016. On contrary, Jet Blue current ratio performance has decline.
|
Quick Ratio |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
1.97 |
2.2 |
1.83 |
1.98 |
|
JetBlue |
0.6 |
0.58 |
0.61 |
0.48 |
|
Industry |
1.1 |
0.9 |
1 |
0.7 |
Although, service industry doesn’t have much inventory but still it is worthy to measure quick ratio to see true liquidity. Inventory is least liquid asset in current assets, thereby, quick ratio shows ability to pay all current liabilities if they come due immediately. Again, Spirit Airline is above average ratio than industry and JetBlue is below average industry ratio. Spirit Airline is performing very well in terms of liquidity ratio and its performance from is consistent and improved from 2016 to 2017. On the other hand, JetBlue Quick ratio performance has declined.
Activity Ratio
|
Day’s sales in receivables |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
4.81 |
5.91 |
12.6 |
16.43 |
|
JetBlue |
8.53 |
8.76 |
11.48 |
12.75 |
|
Industry |
19.8 |
33.5 |
19.7 |
29.6 |
It shows how many day’s sales remain in account receivable. In other words, how many days it takes to collect the average level of receivables. Lower ratio indicates that companies are receiving payments faster. JetBlue and Spirit Airline both receivables are below than average, which means that, both companies are performing well in collecting their account receivables. However, JetBlue is relatively consistent in this ratio as compare to Spirit Airline. From 2014 to 2015, Spirit Airline average receivable was better than JetBlue but in 2016-2017, JetBlue improved. In a nutshell, JetBlue is better than Spirit, because it is consistent, improving and less days in account receivable in recent years.
|
Assets Turnover |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
1.21 |
0.85 |
0.74 |
0.64 |
|
JetBlue |
0.74 |
0.74 |
0.71 |
0.72 |
|
Industry |
0.89 |
0.96 |
0.9 |
0.84 |
It measures the company’s ability to generate sales from its assets. In other words, it shows how efficiently a company can use its assets to generate sales. In general, higher is better. Spirit Airline ratio has declined from 2014 to 2017, whereas, JetBlue is relatively consistent in utilizing their assets. Both companies are performing below average that means not performing good in terms of industry averages. In comparison on both industry, JetBlue is relatively good. Moreover, Spirit Airline ratio has decline with big margin in comparison to industry which is a question mark in company’s worth for utilizing its assets.
|
Account Receivable Turnover |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
42.77 |
41.66 |
31.81 |
28.63 |
|
JetBlue |
85.15 |
75.76 |
56.45 |
22.2 |
|
Industry |
27.26 |
29.14 |
30.69 |
25.85 |
It measures ability to collect cash from credit customers. Above, JetBlue has improved a lot in its collection. In 2017, JetBlue has performed well from industry averages and spirit airline is close to industry ratio. In general, JetBlue is good than industry averages and spirit airline.
Solvency Ratio
|
Debt Ratio |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
0.37 |
0.52 |
0.56 |
0.57 |
|
JetBlue |
0.68 |
0.63 |
0.57 |
0.51 |
|
Industry |
0.32 |
0.33 |
0.37 |
0.36 |
It indicates percentage of assets finance by debt. Both companies have more debt ratio than industry, which means that, both companies have more default risk than industry. In other words, it has more assets financed by debts as compare to industry. Spirit Airline is increasing its debt ratio whereas, JetBlue is reducing its leverage. In general, JetBlue is closer to industry averages.
|
Time Interest Earned Ratio |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
40.58 |
57.92 |
17.05 |
9.32 |
|
JetBlue |
3.79 |
9.96 |
12.74 |
11.76 |
|
Industry |
12.66 |
19.56 |
15.67 |
14.33 |
It measures the number of times operating income can cover interest expense. The declining TIE ratio of spirit airline indicating financial trouble in meeting its liabilities. JetBlue is consistently improving but both companies are below industry ratio. In general, JetBlue is better than spirit but not good as industry is doing.
Profitability Ratio
|
Return on Net Sales |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
0.12 |
0.15 |
0.11 |
0.16 |
|
JetBlue |
0.07 |
0.11 |
0.11 |
0.16 |
|
Industry |
0.03 |
0.04 |
0.035 |
0.057 |
This ratio shows the percentage of each sales dollar earned as net income. This measure provides insight into how much profit is being produced per dollar of sales. An increasing ROS indicates that company is growing more efficiently, while a decreasing ROS could signal financial troubles. Both companies are above industry averages signaling positive sign for generating income from sales. However, spirit airline has improved from 2014 to 2015 and then its decline in 2016 and improved again in 2017. This see-saw curve showing inconsistency in its profitability. On the other hand, JetBlue is relatively consistent in its performance and it also had a tendency to improve a lot as shown in graph. Base on this scenario, one could predict JetBlue for its profitability in long-run.
|
Return on Assets |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
0.15 |
0.13 |
0.09 |
0.11 |
|
JetBlue |
0.06 |
0.09 |
0.09 |
0.13 |
|
Industry |
0.04 |
0.027 |
0.045 |
0.046 |
ROA measures how profitable a company uses it assets. Both companies are above from averages which is a good sign. JetBlue is performing well than Spirit Airline. Spirit Airline showed a deep dip in this ratio. From 2014 to 2016, spirit airline was declining and it spike in 2017. On Contrary, JetBlue was upward trending, consistently improving. In its ROA one could recommend for JetBlue.
|
Return on Shareholders' Common Equity |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
32209.1 |
45317.1 |
37839.8 |
60086.6 |
|
JetBlue |
100.25 |
169.25 |
189.75 |
286.75 |
|
Industry |
|
|
|
|
Return on stockholder’s equity (ROSE) gauges how much is earned with the money invested by common shareholders. Spirit Airline seems upward direction, far above than JetBlue. Every $ invested by shareholder in Spirit Airline is giving multiple of 1000 times return and JetBlue is in 100s. For Investment perspective, Spirit is better. Moreover, ROE of Spirit is also higher than JetBlue. As far as stock performance is concerned, in 2017, Spirit Airline is relatively consistent in stock prices while, JetBlue seems volatile and with more swings. The average decline is stock price of JetBlue is 1.51% and Spirit decline is 0.75%.
|
Earnings Per Share |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
3.08 |
4.38 |
3.76 |
6.06 |
|
JetBlue |
1.19 |
1.98 |
2.22 |
3.47 |
|
Industry |
5.2 |
7.46 |
0.82 |
-7.54 |
Earnings Per Share (EPS) gives the amount of net income per share of the company’s common stock. The sharp decline in airline industry’s EPS has various reasons, but major reason includes, raising oil price, and its seems that demand for seats/air tickets have risen sharply from last few years, but demand for share decline. Another news catching point is American Airline whose overall performance reduced resulting low EPS, disturbed the industry ratios. To compare both companies, Spirit Airline EPS is better than JetBlue.
Investment Ratio
|
Price to Earnings Ratio |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
24.7 |
9.1 |
15.39 |
7.38 |
|
JetBlue |
13.33 |
11.44 |
10.19 |
6.35 |
Price to Earning indicates the market price of $1 of earnings. High PE ratio generally indicates high earnings but it is not necessary a better investment decision because it generally consider that stock is overvalued and soon will decline. On contrary, low PE ratio indicates stock is undervalued. Comparing JetBlue and Spirit Airline, if we look into trend, it seems like Spirit may increase in future and JetBlue will decrease. Other perspective is JetBlue is consistent and Spirit is volatile but it depends on investor if he/she is risk averse or risk taker to marginalize return.
|
Book Value per share of common Stock |
2014 |
2015 |
2016 |
2017 |
|
Spirit Airline |
13.78 |
17.13 |
20.12 |
26.06 |
|
JetBlue |
8.16 |
9.97 |
11.91 |
15.06 |
It indicates the recorded accounting amount for each share of common stock outstanding. Although higher gap between book value and share price indicates stock either undervalued or overvalued. Both companies’ book value is upward trending and there is a lower gap among their share price and book value, which is a positive sign for those who are risk averse.
Horizontal and Vertical Analysis
Spirit Airline Horizontal Analysis:
Income Statement:
As Shown below, total revenue from the base year of 2014 is upward trending, so as with the gross profit raise by 60% in 2017 from base year 2014. However, operating income showed a dip from base year mainly because of increasing expenses. Spirit Airline has achieved significant growth in its net income by 87% in 2017.
Balance Sheet:
Total Assets have an increasing trend which is mainly because of significant addition in property, plant and equipment. This signaling growth and addition in company’s net worth. In long run, these assets insulate growth in firm value. Current Assets has also increase from 2016 to 2017 signaling liquidity.
On the other hand, total liabilities have significantly raised to 401.38% in 2017 which is referring to high default (credit) risk. Thereby, TIE ratio dropped sharply. This has reduced its creditworthiness both short term and long term both because there is a decreasing trend in income before tax.
Spirit Airline Vertical Analysis:
Income Statement:
Net income portion from total revenue is 12% in 2014 and it keep on increasing from 12% to 16% in 2017. Cost of revenue is 69% in 2014 and its struggled to take it down to 64% of revenue. However, operating income is in declining trend because of increasing operating expenses.
Balance Sheet (Vertical Analysis):
Current assets and fixed asset are more or less equally proportionate. Whereas, equity is more than liability. This signaling either shareholders are subjected to more contribution and because of more equity, leveraging risk is lower.
JETBLUE Horizontal Analysis:
Income Statement:
From 2014 to 2017, Revenue has an increasing trend and cost of revenue is decreasing, which insulting increasing trend of gross profit. However, operating expense has increased over time, which reduced the operating income from 258.27% on 2016 to 196.85% of revenue in 2017. Interest expense has reduced to 63.43% from 76.87% in 2016. Its net income also has an increasing trend.
Balance Sheet:
Its liquidity pattern has reduced significantly by 24% but net tangible assets has an increasing trend. JetBlue retained earnings has increased significantly to 358.58% in 2017 signaling long term growth and big projects implementation benefiting firm value. It has also a diminishing liabilities patterns signaling less diminishing interest expense insulating net income.
JETBLUE Vertical Analysis:
Income Statement:
Net income pattern has increased with sufficient proportion from 2014 to 2017. It was 6.89% in 2014 and it lead to 16.35% in 2017. They have lowered their liabilities which reduced its interest expense. Its operating expense proportion has also reduced, allowing operating income to raise.
Balance Sheet:
Its liquidity pattern is not appealing but its net tangible assets has increased overtime. It seems, less concentration on shareholders’ equity signaling less demands for its share. They have reduced its long term liability signaling less credit risk for investors.
Comparative Analysis:
Creditworthiness:
Short-term analysis:
If an investor is seeking to invest in short-term market, then Spirit airline is a good decision. Moreover, they don’t have anything lock up in inventory but JetBlue has, which has reduced its liquidity. Spirit Airline’s liquidity is above average than industry ratio showing positive sign in terms of meeting current liabilities. Spirit Airline has more ability to meet its current liabilities than JetBlue. In addition, Spirit Airline performance for its current ratio has increased in 2017 as compare to 2016. On contrary, Jet Blue current ratio performance has decline.
Long Term Analysis:
Both companies have more debt ratio than industry, which means that, both companies have more default risk than industry. In other words, it has more assets financed by debts as compare to industry. Spirit Airline is increasing its debt ratio whereas, JetBlue is reducing its leverage. In general, JetBlue is closer to industry averages.
Talking about TIE ratio which measures the number of times operating income can cover interest expense. The declining TIE ratio of spirit airline indicating financial trouble in meeting its liabilities. JetBlue is consistently improving but both companies are below industry ratio. In general, JetBlue is better than spirit but not good as industry is doing.
Investment Attractiveness:
An increasing ROS indicates that company is growing more efficiently, while a decreasing ROS could signal financial troubles. Both companies are above industry averages signaling positive sign for generating income from sales. However, spirit airline has improved from 2014 to 2015 and then its decline in 2016 and improved again in 2017. This see-saw curve showing inconsistency in its profitability. On the other hand, JetBlue is relatively consistent in its performance and it also had a tendency to improve a lot as shown in graph. Base on this scenario, one could predict JetBlue for its profitability in long-run.
Measuring attractiveness in terms of return on assets. As shown in graphs above,
Both companies are above from averages which is a good sign. JetBlue is performing well than Spirit Airline. Spirit Airline showed a deep dip in this ratio. From 2014 to 2016, spirit airline was declining and it spike in 2017. On Contrary, JetBlue was upward trending, consistently improving. In its ROA one could recommend for JetBlue. However, talking about return on equity, passed records shows that Spirit is returning to shareholder’s lot more than JetBlue, it also looks like that JetBlue is improving. EPS ratio of Spirit airline is also more pronounced then JetBlue.
Commenting on Price to earnings ratio of both companies, High PE ratio generally indicates high earnings but it is not necessary a better investment decision because it generally consider that stock is overvalued and soon will decline. On contrary, low PE ratio indicates stock is undervalued. Comparing JetBlue and Spirit Airline, if we look into trend, it seems like Spirit may increase in future and JetBlue may decrease. Other perspective is JetBlue is consistent then Spirit. It depends on investor if she/he is risk taker or risk averse to expand returns.
In a nutshell, for profitability point of view, JetBlue seems like a fast growing company than spirit. But if we see past pattern of stock performance, spirit may take the lead if it improves on above ratio.
Conclusion:
Both airlines are well known airlines of US. However, JetBlue’s fleet is one of the youngest and most fuel-efficient in the industry, also has some of the best amenities for a “value” airline. As a result, the company has been posting strong sales and earnings gains in recent quarters. We look for the good times to continue. JetBlue should also benefit from its efforts to continue to expand other margin-enhancing premium goods and services. While there are some risks, including considerable industry competition, along with the fact the results are highly dependent on the price of fuel, we think the positives outweigh the negatives. While the stock price is near an all-time high, investors could still see some room for price appreciation, given bright outlook. Assuming the success of its expansion plans, there could also be some appeal for longer-term investors, as well. As also discussed above, horizontal and vertical analyses of JetBlue is more pronounced and its financial statements too.
On Contrary, Spirit Airline is facing trouble in its operations because of high attrition rate and diminishing sales. It has constantly increasing its cost but not the revenue. It also has limited success in its non-core business. It need to work on its financial planning and Research and development to compete with others and improve its profitability.
Reference:
http://ir.spirit.com/financials-filings/overview
http://ir.spirit.com/financial-information/annual-reports
http://ir.spirit.com/financials-filings/sec-filings
https://www.nasdaq.com/symbol/save/financials?query=income-statement
https://www.marketwatch.com/investing/stock/save/financials
https://quotes.wsj.com/SAVE/financials
https://finance.yahoo.com/quote/save/financials/
http://blueir.investproductions.com/investor-relations/financial-information/reports/annual-reports
https://www.nasdaq.com/symbol/jblu/financials?query=income-statement
https://finance.yahoo.com/quote/JBLU/financials/
https://www.marketwatch.com/investing/stock/jblu/financials
https://quotes.wsj.com/JBLU/financials
http://financials.morningstar.com/ratios/r.html?t=JBLU
https://www.reuters.com/finance/stocks/income-statement/JBLU.O
https://www.businessinsider.com/airlines-biggest-business-problems-2018-4#labor-relations-6
https://getawaytips.azcentral.com/airline-industry-swot-analysis-12208038.html
https://traveltips.usatoday.com/history-airline-industry-100074.html
https://aviationbenefits.org/economic-growth/the-future/
https://www.apnews.com/adbb94ef50db443b901a1ae90e2f1834
https://www.referenceforbusiness.com/history2/38/JetBlue-Airways-Corporation.html
https://www.seatmaestro.com/airlines-seating-maps/jetblue-airways/history/
https://successstory.com/companies/jetblue
Appendix:
|
INDUSTRY |
2014 |
2015 |
2016 |
2017 |
|
Solvency |
Median |
Median |
Median |
Median |
|
Quick Ratio |
1.1 |
0.9 |
1 |
0.7 |
|
Current Ratio |
1.6 |
1.5 |
1.6 |
1.5 |
|
Current Liabilities / Net Worth (%) |
37.7 |
47.1 |
52.5 |
62.9 |
|
Current Liabilities / Inventory (%) |
999.9 |
999.9 |
999.9 |
978.2 |
|
Total Liabilities / Net Worth (%) |
104.3 |
135.9 |
135.3 |
145.6 |
|
Fixed Assets / Net Worth (%) |
93.1 |
133.3 |
116.1 |
96 |
|
Efficiency |
Median |
Median |
Median |
Median |
|
Collection Period (days) |
19.8 |
33.5 |
19.7 |
29.6 |
|
Sales / Inventory (times) |
56.3 |
54.1 |
48.6 |
37.1 |
|
Assets / Sales (%) |
100.3 |
111.7 |
125.9 |
125 |
|
Sales / Net Working Capital (times) |
5.9 |
4.9 |
5.3 |
3.6 |
|
Accounts Payable / Sales (%) |
4.2 |
4.5 |
5.8 |
5.8 |
|
Profitability |
Median |
Median |
Median |
Median |
|
Return on Sales (%) |
3.3 |
4.4 |
3.5 |
5.7 |
|
Return on Assets (%) |
3.9 |
2.7 |
4.5 |
4.6 |
|
Return on Net Worth (%) |
8.3 |
7.1 |
12.8 |
13.2 |
|
Median INDUSTRY Variance |
|
|
2015 |
|
2016 |
|
|
|
|
2017 |
|
|
|
|
|
Solvency |
2017 |
2015 |
Median |
2016 |
Median |
2013 |
2014 |
2015 |
2017 |
Median |
2013 |
2014 |
2015 |
2016 |
|
Quick Ratio |
22.2 |
18.2 |
0.9 |
-11.1 |
1 |
11.1 |
-9.1 |
11.1 |
30 |
0.7 |
-22.2 |
-36.4 |
-22.2 |
-30 |
|
Current Ratio |
11.8 |
6.3 |
1.5 |
-6.7 |
1.6 |
-5.9 |
0 |
6.7 |
6.3 |
1.5 |
-11.8 |
-6.3 |
0 |
-6.3 |
|
Current Liabilities / Net Worth (%) |
-17.3 |
-9.4 |
47.1 |
-5.4 |
52.5 |
6.9 |
14.8 |
5.4 |
-10.4 |
62.9 |
17.3 |
25.2 |
15.8 |
10.4 |
|
Current Liabilities / Inventory (%) |
21.7 |
0 |
999.9 |
0 |
999.9 |
0 |
0 |
0 |
21.7 |
978.2 |
-21.7 |
-21.7 |
-21.7 |
-21.7 |
|
Total Liabilities / Net Worth (%) |
-31.5 |
-31.6 |
135.9 |
0.6 |
135.3 |
21.2 |
31 |
-0.6 |
-10.3 |
145.6 |
31.5 |
41.3 |
9.7 |
10.3 |
|
Fixed Assets / Net Worth (%) |
5.5 |
-40.2 |
133.3 |
17.2 |
116.1 |
14.6 |
23 |
-17.2 |
20.1 |
96 |
-5.5 |
2.9 |
-37.3 |
-20.1 |
|
Efficiency |
2017 |
2015 |
Median |
2016 |
Median |
2013 |
2014 |
2015 |
2017 |
Median |
2013 |
2014 |
2015 |
2016 |
|
Collection Period (days) |
-17.3 |
69.2 |
33.5 |
-41.2 |
19.7 |
45 |
0.5 |
41.2 |
50.3 |
29.6 |
17.3 |
-49.5 |
11.6 |
-50.3 |
|
Sales / Inventory (times) |
20.7 |
3.9 |
54.1 |
10.2 |
48.6 |
3.8 |
-13.7 |
-10.2 |
23.7 |
37.1 |
-20.7 |
-34.1 |
-31.4 |
-23.7 |
|
Assets / Sales (%) |
-53.9 |
-11.4 |
111.7 |
-14.2 |
125.9 |
54.8 |
25.6 |
14.2 |
0.9 |
125 |
53.9 |
24.7 |
13.3 |
-0.9 |
|
Sales / Net Working Capital (times) |
32.1 |
16.9 |
4.9 |
-8.2 |
5.3 |
0 |
-10.2 |
8.2 |
32.1 |
3.6 |
-32.1 |
-39 |
-26.5 |
-32.1 |
|
Accounts Payable / Sales (%) |
-1.6 |
-0.3 |
4.5 |
-1.3 |
5.8 |
1.6 |
1.6 |
1.3 |
0 |
5.8 |
1.6 |
1.6 |
1.3 |
0 |
|
Profitability |
2017 |
2015 |
Median |
2016 |
Median |
2013 |
2014 |
2015 |
2017 |
Median |
2013 |
2014 |
2015 |
2016 |
|
Return on Sales (%) |
-2.1 |
-1.1 |
4.4 |
0.9 |
3.5 |
-0.1 |
0.2 |
-0.9 |
-2.2 |
5.7 |
2.1 |
2.4 |
1.3 |
2.2 |
|
Return on Assets (%) |
-1.2 |
1.2 |
2.7 |
-1.8 |
4.5 |
1.1 |
0.6 |
1.8 |
-0.1 |
4.6 |
1.2 |
0.7 |
1.9 |
0.1 |
|
Return on Net Worth (%) |
-3.6 |
1.2 |
7.1 |
-5.7 |
12.8 |
3.2 |
4.5 |
5.7 |
-0.4 |
13.2 |
3.6 |
4.9 |
6.1 |
0.4 |
Current Ratio
Spirit airline 2014 2015 2016 2017 1.9733332603986609 2.2013126286890872 1.8344675251433404 1.9786840096070328 JetBlue 2014 2015 2016 2017 0.6198347107438017 0.60351648351648357 0.63369467028003612 0.50354906054279747 Industry 2014 2015 2016 2017 1.6 1.5 1.6 1.5
Quick Ratio
Spirit Airline 2014 2015 2016 2017 1.97 2.2000000000000002 1.83 1.98 JetBlue 2014 2015 2016 2017 0.6 0.57999999999999996 0.61 0.48 Industry 2014 2015 2016 2017 1.1000000000000001 0.9 1 0.7
Day's sales in receivables
Spirit Airline 2014 2015 2016 2017 4.8099999999999996 5.91 12.6 16.43 JetBlue 2014 2015 2016 2017 8. 5299999999999994 8.76 11.48 12.75 Industry 2014 2015 2016 2017 19.8 33.5 19.7 29.6
Assets Turnover
Spirit Airline 2014 2015 2016 2017 1.21 0.85 0.74 0.64 JetBlue 2014 2015 2016 2017 0.74 0.74 0.71 0.72 Industry 2014 2015 2016 2017 0.89 0.96 0.9 0.84
Account Receivable turnover
Spirit Airline 2014 2015 2016 2017 42.77 41.66 31.81 28.63 JetBlue 2014 2015 2016 2017 85.15 75.760000000000005 56.45 22.2 Industry 2014 2015 2016 2017 27.26 29.14 30.69 25.85
Debt Ratio
Spirit Airline 2014 2015 2016 2017 0.37 0.52 0.56000000000000005 0.56999999999999995 JetBlue 2014 2015 2016 2017 0.6 8 0.63 0.56999999999999995 0.51 Industry 2014 2015 2016 2017 0.32 0.33 0.37 0.36
Time Interest Earned Ratio
Spirit Airline 2014 2015 2016 2017 40.58 57.92 17.05 9.32 JetBlue 2014 2015 2016 2017 3.79 9.9600000000000009 12.74 11.76 Industry 2014 2015 2016 2017 12.66 19.559999999999999 15.67 14.33
Return on Net Sales
Spirit Airline 2014 2015 2016 2017 0.12 0.15 0.11 0.16 JetBlue 2014 2015 2016 2017 7.0000000000000007E-2 0.11 0.11 0.16 Industry 2014 2015 2016 2017 0.03 0.04 3.5000000000000003E-2 5.7000000000000002E-2
Return on Assets
Spirit Airline 2014 2015 2016 2017 0.15 0.13 0.09 0.11 JetBlue 2014 2015 2016 2017 0.06 0.09 0.09 0.13 Industry 2014 2015 2016 2017 0.04 2.7E-2 4.4999999999999998E-2 4.5999999999999999E-2
Return on Stockholders' Common Equity
Spirit Airline 2014 2015 2016 2017 32209.14 45317.14 37839.800000000003 60086.57 JetBlue 2014 2015 2016 2017 100.25 169.25 189.75 286.75 Industry 2014 2015 2016 2017
Earning Per Share
Spi rit Airline 2014 2015 2016 2017 3.08 4.38 3.76 6.06 JetBlue 2014 2015 2016 2017 1.19 1.98 2.2200000000000002 3.47 Industry 2014 2015 2016 2017 5.2 7.46 0.82 -7.54
Price to Earning Ratio
Spirit Airline 2014 2015 2016 2017 24.7 9.1 15.39 7.38 JetBlue 2014 2015 2016 2017 13.33 11.44 10.19 6.35
Book Value per Share of Common Stock
Spirit Airline 2014 2015 2016 2017 13.78 17.13 20.12 26.06 JetBlue 2014 2015 2016 2017 8.16 9.9700000000000006 11.91 15.06