JETBLUE AIRWAYS CORP quarterly report, Q3 FY2019

JetBlue Airways Corporation — Q3 2019 Form 10-Q

Reporting period: Three and nine months ended September 30, 2019. Unaudited results; amounts in U.S. dollars unless stated otherwise. JetBlue provides air transportation across the United States, the Caribbean, and Latin America.

Financial performance

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Operating revenue	$2.086 billion	$2.008 billion	$6.063 billion	$5.690 billion
Operating income	$247 million	$78 million	$573 million	$50 million
Operating margin	11.8%	3.9%	9.4%	0.9%
Net income	$187 million	$50 million	$408 million	$19 million
Diluted EPS	$0.63	$0.16	$1.35	$0.06

Q3 passenger revenue rose 3.3% to $2.005 billion; other revenue increased 21.6% to $81 million. Capacity, measured by available seat miles (ASMs), grew 4.8%; average fare rose 3.2%, while load factor fell 0.4 percentage points to 85.5%. Revenue per ASM (RASM) declined 0.9% to 12.80 cents.

Q3 operating expenses fell 4.7% to $1.839 billion, partly because the prior-year quarter included $112 million of special items. Excluding special items, operating expenses increased 1.1%. Fuel expense declined 8.5% as average fuel price fell 11.0% to $2.06 per gallon, despite 2.8% higher consumption. Salaries, wages and benefits rose 12.6%, principally due to the pilot agreement and higher crew headcount. Management reported Q3 CASM excluding fuel, special items, and non-airline business expenses of 8.33 cents, up 0.3% year over year.

For the first nine months, revenue increased 6.6%; ASMs rose 6.8%, average fare increased 5.0%, and load factor declined 0.9 points to 84.7%. Adjusted diluted EPS, a non-GAAP measure excluding specified special items, the equity-investment gain, and the 2018 tax-reform impact, was $0.59 for Q3 versus $0.42 and $1.35 for the nine months versus $1.05. The company recorded a $15 million pre-tax equity-method investment gain in Q3 2019.

Cash flow, balance sheet, and financing

• Nine-month operating cash flow was $1.198 billion, compared with $924 million in 2018. Capital expenditures were $505 million and aircraft pre-delivery deposits were $172 million; company-defined free cash flow was $521 million, versus $263 million.
• At September 30, unrestricted cash and cash equivalents were $695 million and short-term investments were $299 million, totaling $994 million. Restricted cash was $62 million.
• Total assets were $11.319 billion and stockholders’ equity was $4.764 billion. Working capital was negative $1.3 billion, which the company said is customary in the airline industry in part because of current air-traffic liabilities.
• Balance-sheet debt and finance-lease obligations totaled approximately $1.636 billion, including current maturities; long-term operating lease liabilities were $739 million and current operating lease liabilities were $133 million. The company reported $1.862 billion of scheduled debt and finance-lease payments in its contractual-obligations table, which includes estimated interest.
• Financing activities included $381 million of treasury-share purchases, $258 million of debt and finance-lease repayments, and $218 million of new debt issuance. The company had no borrowings outstanding on its disclosed revolving credit lines; the Citibank facility was increased to $550 million and extended through August 2023.

Changes, outlook, risks, and unusual items

• Compared with Q3 2018, reported earnings improved substantially, while the comparison benefited from the prior-year quarter’s $112 million of special charges. For the first nine months, special items were $14 million in 2019 versus $431 million in 2018, including a $319 million prior-year impairment related to the Embraer E190 fleet transition.
• Management said Q3 RASM decline of 0.9% was slightly better than the midpoint of its updated guidance range of down 2.0% to flat. CASM excluding fuel and specified items increased 0.3%, better than the low end of the initial 0.5%–2.5% range; management cited its Structural Cost Program and maintenance costs shifting into Q4. The filing provides no clear full-year earnings forecast.
• Management expected positive working capital generation from operations and believed liquidity would meet cash needs for at least the next 12 months. It also cautioned that results may fluctuate by quarter and that expenses may rise with fleet growth, fleet age, and service expansion.
• Fleet plans included 84 Airbus A321neo and 70 Airbus A220 aircraft scheduled through 2026. Airbus delivery delays meant no more than six A321neo deliveries were expected in 2019. The company cited a 10% U.S. tariff on certain EU commercial aircraft and parts as a potential material cost and operational risk; it was evaluating the impact.
• Aircraft purchase obligations totaled $8.538 billion, with $781 million scheduled for the remainder of 2019. JetBlue warned that financing for future aircraft deliveries might not be available on attractive terms and that tariffs could raise aircraft costs. In October 2019, after the quarter-end, the U.S. announced the relevant tariffs.
• Other risks highlighted include fuel-price volatility, labor costs or disruption, supplier dependence and delivery delays, congestion and runway closures in the Northeast, economic and demand changes, weather, and operational or cybersecurity disruptions. Q3 systemwide on-time performance was 73.7%; management noted continued challenges from Northeast congestion.
• The company adopted the new lease accounting standard in 2019, recognizing lease assets and liabilities on the balance sheet. It reported effective disclosure controls; an ERP system upgrade was completed during September 2019.

Important facts for investors to verify

• Whether revenue and unit-cost trends continue, particularly the Q3 RASM decline and management’s expectation that some maintenance expense shifts to Q4.
• The final cost and delivery effects of Airbus delays and the 10% tariff, and whether planned aircraft purchases can be financed on acceptable terms.
• Cash generation relative to aircraft commitments, capital spending, debt service, and share repurchases; also review the $1.3 billion working-capital deficit and available credit facilities.
• How labor-agreement costs, fuel prices and limited fuel hedging affect margins. A hypothetical 10% fuel-price increase was estimated to raise next-12-month fuel expense by about $182 million.
• The sustainability of reported earnings after considering the $15 million investment gain, prior-period special charges, and the company’s non-GAAP adjustments.
• Potential outcomes of pending legal matters and other contingencies; the filing says outcomes could be material but does not provide a clear quantified exposure.