JBLU

JetBlue Airways Corporation - 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, and the six-month period ended on the same date. JetBlue Airways Corporation is a low-cost carrier operating primarily in the U.S. domestic market. The company is executing a "Return to Profitability" (RTP) plan initiated in April 2006, focusing on right-sizing capacity, optimizing revenue, and reducing costs amidst an industry challenged by record-high fuel prices.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 42% ($183 million) for the quarter and 37% ($300 million) for the six months compared to 2005. This was driven by a 38% increase in departures and a 22% increase in yield (average fare) for the quarter.
• Profitability Shift: While the company reported a net income of $14 million for the quarter (up from $13 million in 2005), the six-month period resulted in a net loss of $18 million compared to a net income of $19 million in the prior year. This deterioration was primarily due to the first quarter's performance and rising costs.
• Cost Pressures: Operating expenses increased 45% for the quarter and 47% for the six months. Aircraft fuel expense surged 72% for the quarter and 78% for the six months, driven by a 38% increase in the average fuel cost per gallon (from $1.50 to $2.06 in Q2).
• Accounting Change: Effective January 1, 2006, the company adopted SFAS 123(R) for stock-based compensation, resulting in $11 million of additional expense for the six months ended June 30, 2006.
• Operational Metrics: Load factor declined 5.5 points to 82.2% for the quarter, though average fares increased 15% to $127.87. Operating capacity increased 23% due to fleet expansion.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year operating capacity to increase 20% to 22% over 2005. However, average stage length is expected to decrease 12% due to the introduction of shorter-range EMBRAER 190 aircraft and a shift away from East-West markets.
• Cost Targets: The company anticipates achieving approximately $60 million in net revenue and expense savings through the remainder of the year via the RTP plan. Full-year operating margin is projected to be between 2% and 4%.
• Fuel Hedging: As of June 30, 2006, only 40% of remaining 2006 fuel requirements were hedged. The company expects fuel costs per available seat mile to increase 14% to 16% over 2005 levels.
• Liquidity: The company reported a working capital deficit of $221 million, which is customary for the airline industry due to the classification of air traffic liability. Management believes available cash, investment securities, and operating cash flows will meet requirements for the next 12 months, though financing is still needed for one remaining 2006 aircraft delivery.
• Risks: Key risks include continued high fuel prices, the competitive environment, the ability to secure financing for aircraft deliveries, and the integration of new aircraft types. The company also faces potential labor organizing efforts, though a recent petition by the IAM was dismissed.

Investor Verification Checklist

• Fuel Hedging Exposure: Verify the extent of unhedged fuel requirements for the remainder of 2006 and the sensitivity of operating margins to further price increases.
• Financing for Deliveries: Confirm the status of financing for the one remaining 2006 aircraft delivery that is not yet secured.
• Stock-Based Compensation Impact: Review the $39 million of unrecognized stock-based compensation expense and its expected recognition over the next three to five years.
• LiveTV Revenue: Assess the growth trajectory of third-party LiveTV installations and deferred profit recognition.
• Debt Covenants: Note that financial covenants were eliminated for refinanced debt, but verify terms for new debt instruments issued in 2006.