JBLU

JetBlue Airways Corp. 2003 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2003. JetBlue Airways Corporation is a low-fare, low-cost passenger airline operating primarily on point-to-point routes between 22 destinations in 11 states and Puerto Rico. As of the reporting date, JetBlue was the 11th largest passenger carrier in the U.S. based on revenue passenger miles. The company operates a fleet of 53 Airbus A320 aircraft (as of Dec 31, 2003) with primary hubs at New York's JFK and Long Beach Municipal Airport. The company differentiates itself through high-quality service, new aircraft, free in-flight entertainment (LiveTV), and a non-union workforce.

Key Financial Metrics

Unit Costs: Operating expense per available seat mile (CASM) was 6.08 cents in 2003, down from 6.43 cents in 2002. Fuel cost per gallon averaged 85.08 cents in 2003.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 57.2% to $998.4 million, driven by a 51.6% increase in departures and a 1.5 point increase in load factor, partially offset by a 7.0% decrease in yield.
• Profitability: Net income nearly doubled to $103.9 million. Operating income increased by $63.8 million. The company recorded $22.8 million in government compensation (Emergency War Time Act) in 2003, compared to $0.4 million in 2002.
• Cost Structure: Total operating expenses rose 56.5% to $829.5 million due to fleet expansion (average of 17 additional aircraft). However, unit costs decreased 5.5% due to economies of scale and lower distribution costs (73% of sales booked online).
• Balance Sheet: Total debt increased to $1.11 billion (62.3% of total capitalization) to finance aircraft acquisitions. Cash reserves more than doubled to $570.7 million.

Guidance, Outlook, and Risks

2004 Outlook:

• Capacity is expected to increase 35-37% with the addition of 16 new Airbus A320 aircraft.
• Operating margin on a fuel-neutral basis is projected between 13% and 15%.
• Unit costs are expected to be slightly higher than 2003 on a fuel-neutral basis due to rising maintenance costs as the fleet ages, partially offset by fixed cost leverage.
• Fuel costs are expected to be higher in Q1 2004; the company has hedged approximately 40% of its full-year 2004 fuel requirements.

Key Risks and Contingencies:

• Competition: Intense price competition from major airlines launching low-fare subsidiaries (e.g., Delta's Song, United's Ted) and aggressive fare matching in key markets.
• Fuel Volatility: Fuel is the second-largest operating expense. Significant price increases could materially harm results despite hedging.
• Legal Proceedings: Multiple lawsuits filed in late 2003 regarding the disclosure of customer data to a government contractor. The impact is currently indeterminable.
• Fixed Obligations: Significant commitments for aircraft purchases ($6.58 billion) and operating leases ($1.08 billion) create high fixed costs.
• Regulatory: Dependence on slot exemptions at JFK and LaGuardia; potential for increased airport fees.

Investor Verification Checklist

• Fleet Aging Costs: Verify the trajectory of maintenance expenses as aircraft warranties expire and the fleet ages beyond the current 21-month average age.
• Fuel Hedging Effectiveness: Monitor the extent of fuel price volatility and the sufficiency of the 40% hedge coverage for 2004.
• Competitive Response: Assess the impact of new low-fare entrants and price wars on yield and load factors in core markets (NY-Florida, NY-West Coast).
• Legal Exposure: Track the status of the customer data privacy lawsuits and potential regulatory fines.
• Financing Capacity: Confirm the ability to secure debt or lease financing for the remaining 2004 aircraft deliveries given the high leverage ratio.