JetBlue Airways Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017. Figures are unaudited and in U.S. dollars unless noted. JetBlue provides air transportation across the United States, the Caribbean and Latin America.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $1.754 billion | $1.600 billion |
| Operating income / margin | $128 million / 7.3% | $142 million / 8.9% |
| Net income | $88 million | $82 million |
| Diluted EPS | $0.27 | $0.24 |
| Operating cash flow | $494 million | $432 million |
| Capital expenditures and aircraft deposits | $203 million | $285 million |
- Revenue rose 9.6%, led by passenger revenue up 8.7%. Average fare increased 6.8%, capacity (ASMs) rose 3.3%, and load factor improved 0.7 percentage points to 84.6%.
- Operating expenses increased 11.5% to $1.626 billion. Fuel expense rose 29.2% to $417 million; average fuel price increased 23.8% to $2.09 per gallon. Total operating expense per ASM rose 8.0% to 11.59 cents; excluding fuel and specified non-airline costs, it increased 3.1% to 8.55 cents.
- Cash, cash equivalents and restricted cash totaled $571 million at quarter-end, including $511 million unrestricted cash. Unrestricted cash, cash equivalents and short-term investments were $779 million; available undrawn credit lines were approximately $625 million.
- Balance-sheet debt and capital lease obligations were approximately $1.143 billion: $248 million current and $895 million long-term. JetBlue reported a $1.2 billion working-capital deficit, largely reflecting current air traffic liabilities. Management said liquidity should be sufficient for at least 12 months.
- Total assets were $10.027 billion and stockholders’ equity was $4.697 billion. The company repurchased 5.8 million shares for an average $21.49 per share through a $125 million accelerated share repurchase.
Material changes and operating developments
- Operating income fell $14 million year over year and operating margin declined 1.6 percentage points, despite higher revenue and net income. Higher fuel costs were a principal pressure.
- Winter storms in the Northeast constrained capacity growth below the low end of guidance. Completion factor declined to 95.7% from 96.5%; on-time performance fell to 71.5% from 75.0%. Management noted the company’s concentration in congested Northeast markets.
- Tax expense declined to $22 million from $39 million, and the effective tax rate fell to 20.0% from 32.2%, primarily reflecting the 2017 Tax Cuts and Jobs Act. Management expected a 24%–26% effective annual tax rate for 2018.
- JetBlue adopted ASC 606 using retrospective application. The adoption did not significantly affect earnings, but changed loyalty-program accounting and increased the TrueBlue-related air traffic liability under the new relative-fair-value approach. The company recorded a $48 million cumulative retained-earnings adjustment as of January 1, 2016. Q1 2017 revenue was reclassified, including $107 million from other to passenger revenue.
Outlook, commitments and risks
- Q2 2018 outlook: CASM excluding fuel expected to increase 2%–4%; RASM expected to range from down 3% to flat, with capacity growth of 5%–7%.
- Full-year 2018 outlook: CASM excluding fuel expected to range from down 1% to up 1%, and capacity growth of 6.5%–8.5%. Management expected first-half CASM excluding fuel growth of 2%–4%, citing lower Q1 completion factor, and second-half decline of 2%–4%. Comparisons are affected by 2017 hurricane costs and a $1,000 tax-reform bonus for eligible crewmembers.
- JetBlue had no fuel hedges outstanding at March 31. A hypothetical 10% increase in fuel cost was estimated to raise fuel expense by approximately $174 million over the next 12 months. A 100-basis-point increase in interest rates was estimated to add about $2 million to annual interest expense.
- Aircraft purchase commitments totaled approximately $7.34 billion, including $679 million for the remainder of 2018. Total contractual obligations were $11.898 billion. Management anticipated using cash and debt financing for 2018 deliveries; financing terms or availability for later deliveries are not assured. Non-aircraft capital expenditures were expected to be $150 million–$200 million for 2018.
- Other disclosed risks include fuel-price volatility, severe weather, Northeast congestion, competition, financing and fixed-cost obligations, labor relations, operational technology and cybersecurity, and economic or geopolitical disruption. Pilots were represented by ALPA; inflight crewmembers elected TWU representation in April 2018, with collective bargaining anticipated.
- Management reported effective disclosure controls. It was evaluating controls related to the material process changes accompanying ASC 606 adoption. The filing says pending legal matters could produce material losses, although no such matters had materially affected operations or financial condition to date.
Important facts for investors to verify
- Whether fares, capacity, load factor and revenue trends support the stated Q2 and full-year outlook, particularly given weather-related operating disruption.
- Whether fuel costs continue to rise and how the absence of fuel hedges affects margins and cash flow.
- How the $7.34 billion aircraft commitment schedule will be financed and whether liquidity, debt maturities and working-capital needs remain manageable.
- Whether cost performance improves as guided, including the impact of labor negotiations, fleet growth and operational reliability.
- How ASC 606 affects ongoing loyalty liabilities and revenue timing, and whether the related control changes operate effectively.