Why JetBlue Rallied Today

Shares of JetBlue (NASDAQ: JBLU) rallied on Wednesday, up 12.4% as of 2 p.m. ET.

The airline appears to be benefiting from news that a big rival, which JetBlue actually tried to acquire last year, may go bankrupt. A bankruptcy of a key competitor has the potential to benefit other airlines, especially smaller ones like JetBlue.

Spirit preparing to file for bankruptcy

Today, The Wall Street Journal reported that rival low-cost carrier Spirit Airlines intends to file for bankruptcy protection, after negotiations for a merger with Frontier Airlines broke down. Additionally, Spirit said it would delay the filing of its quarterly report last night, and that it was in discussions with its bondholders for notes maturing in 2025 and 2026 about restructuring.

As a reminder, JetBlue had attempted to acquire Spirit last year, only to have the merger blocked by a federal judge. Ever since, Spirit has run into operational hang-ups and rising costs, leading to this point. There had been hope that a merger with Frontier could save the airline and its shareholders, but it appears those hopes are dashed for now.

Spirit may continue to operate, but in order to pay off debt holders, the company may have to sell off assets and downsize. That has the potential to benefit other sub-scale competitors such as JetBlue, which may pick up additional customers left behind by a Spirit downsizing.

JetBlue could certainly use the help. Outside of the big four airlines, other smaller players have struggled to remain profitable in the cutthroat airline industry. Last quarter, JetBlue reported a net loss of $60 million, bringing its total year-to-date losses to $751 million.

Looking ahead

Despite the positive news for JetBlue today, investors should still be cautious with the stock. While it may be true that competition has lessened somewhat, JetBlue is still up against the larger scale "big four" competitors. Still generating operating losses and with about $5.6 billion in net debt, JetBlue remains a stock to avoid.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.