JBLU

Business Context and Reporting Period

Company: JetBlue Airways Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Overview: JetBlue is a major low-cost passenger airline operating primarily on point-to-point routes. As of December 31, 2005, the company operated a fleet of 92 aircraft (85 Airbus A320 and 7 Embraer 190) serving 34 destinations. The company reported its first net loss since its inception in 2000, driven primarily by record-high fuel prices and intense industry competition that limited fare increases.

Key Financial Metrics

Operational Statistics:

• Load Factor: 85.2% (Industry average: 78.0%)
• Aircraft Utilization: 13.4 hours/day
• Average Fuel Cost: $1.61/gallon (up 52.0% from 2004)
• Fuel as % of Operating Expenses: 29.5%

Material Changes vs. Prior Period

• Profitability Decline: The company shifted from a net income of $46 million in 2004 to a net loss of $20 million in 2005. Operating income dropped by $63 million.
• Fuel Cost Surge: Aircraft fuel expense increased 91.1% ($233 million) due to a 52.0% rise in the average price per gallon and increased consumption. Fuel became the single largest operating expense.
• Revenue Growth: Operating revenues grew 34.5%, driven by a 23.7% increase in departures and a 3.5% increase in yields, despite a competitive environment.
• Expense Growth: Total operating expenses rose 43.3%, outpacing revenue growth. Salaries, wages, and benefits increased 26.8%, while depreciation and amortization rose 49.3% due to fleet expansion.
• Debt Expansion: Total debt increased by $781 million to $2.33 billion to finance aircraft acquisitions and facility construction, including a new terminal at JFK.

Guidance, Outlook, and Risks

2006 Outlook:

• Capacity: Expected to increase 28% to 30% with the addition of 35 new aircraft.
• Costs: Cost per available seat mile (CASM) is expected to increase 10% to 12% assuming fuel prices of $1.98/gallon (net of hedges).
• Profitability: Management anticipates an operating margin between 2% and 4% and a net loss for the full year 2006.
• Accounting Change: Adoption of SFAS No. 123(R) in 2006 will require recording approximately $20 million in non-cash stock-based compensation expense.

Key Risks and Contingencies:

• Fuel Volatility: Continued high fuel prices or supply shortages could materially harm financial results. The company hedges approximately 30% of its 2006 fuel requirements.
• Internal Control Weakness: The company identified a material weakness in internal controls over financial reporting related to the valuation of derivative financial instruments in Q4 2005. This resulted in an audit opinion that was unqualified on the financial statements but adverse on the effectiveness of internal controls.
• Competition: Intense price competition and industry bankruptcies (e.g., Delta, Northwest) may lead to more aggressive pricing by competitors.
• Fixed Obligations: Significant fixed obligations include $6.44 billion in aircraft purchase commitments and substantial lease payments.

Investor Verification Checklist

• Fuel Hedging Effectiveness: Verify the extent of fuel price protection for 2006 and the impact of unhedged exposure on margins.
• Internal Control Remediation: Confirm the implementation of new procedures to address the material weakness in derivative valuation identified in Q4 2005.
• Debt Covenants: Review compliance with financial covenants, specifically the requirement that EBITDA be at least twice interest expense and tangible net worth be at least 12% of total assets.
• Stock-Based Compensation Impact: Assess the full impact of SFAS 123(R) adoption on 2006 reported earnings versus cash flow.
• Terminal 5 Construction: Monitor the progress and cost overruns associated with the $740 million JFK Terminal 5 project.