JetBlue Airways Corporation — 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017; quarterly data includes the fourth quarter. JetBlue carried approximately 40 million passengers, operated an average of 1,000 daily flights, and served 101 destinations, primarily through a point-to-point network concentrated in the Northeast, Florida, the Caribbean, and Latin America.
Financial results and key metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Operating revenue | $7.015 billion | $6.632 billion |
| Operating income / margin | $1.000 billion / 14.3% | $1.312 billion / 19.8% |
| Income before taxes | $921 million | $1.216 billion |
| Net income | $1.147 billion | $759 million |
| Diluted EPS | $3.47 | $2.22 |
| Operating cash flow | $1.398 billion | $1.632 billion |
| Free cash flow (non-GAAP) | $196 million | $621 million |
| Cash and cash equivalents | $303 million | $433 million |
| Total debt and capital lease obligations | $1.207 billion | $1.395 billion |
- Fourth-quarter revenue was $1.756 billion, operating income $189 million, and net income $672 million; diluted EPS was $2.08. The quarter included a one-time $570 million tax benefit from U.S. tax reform.
- Revenue increased 5.8% year over year, driven principally by 4.6% passenger growth. Other revenue rose 17.3%; passenger revenue rose 4.6%.
- Operating expenses increased 13.1% to $6.015 billion. Fuel expense rose 26.9% to $1.363 billion; average fuel cost increased to $1.72 per gallon from $1.41.
- Operating expense per available seat mile (CASM) rose 8.2% to 10.74 cents. CASM excluding fuel and specified non-airline expenses increased 4.8% to 8.30 cents.
- Load factor declined to 84.3% from 85.1%; capacity (ASMs) grew 4.5%. Average fare was nearly flat at $157.07.
- Year-end unrestricted cash, cash equivalents, and short-term investments totaled approximately $693 million; undrawn credit lines were approximately $625 million. Working capital deficit was $1.2 billion.
Material changes versus the prior period
- Operating income fell $312 million and operating margin declined 5.5 percentage points, largely reflecting higher fuel and other operating costs. Net income nevertheless increased because the tax benefit more than offset lower pretax earnings.
- Operating cash flow fell $234 million and free cash flow fell $425 million, reflecting higher fuel costs and greater capital spending.
- JetBlue repurchased approximately 18.7 million shares for about $380 million and reduced debt and capital lease obligations by $185 million. The Board authorized up to $750 million of repurchases over two years beginning January 1, 2018.
- Hurricanes Irma and Maria and related disruptions were estimated to reduce 2017 revenue by approximately $110 million and operating income by approximately $82 million. JetBlue temporarily redeployed some Caribbean leisure flying and expected a return to full Puerto Rico operation by the end of 2018.
Outlook, risks, and unusual items
- For 2018, management projected capacity growth of approximately 6.5%–8.5%, with 10 additional A321 aircraft. It expected CASM excluding fuel and specified non-airline expenses to change between a 1.0% decrease and a 1.0% increase from 2017.
- Management estimated a 2018 effective tax rate of 24%–26%, subject to further interpretation and guidance on tax reform. The 2017 tax benefit is nonrecurring and materially boosts reported net income and EPS.
- 2018 capital expenditures were estimated at $900 million–$1.1 billion. Aircraft purchase commitments totaled approximately $7.3 billion through 2024; total contractual obligations were $12.2 billion.
- JetBlue cited intense fare competition, fuel-price volatility, labor and maintenance cost pressures, congestion and reliance on New York and Boston, weather and hurricane exposure, supplier concentration, cybersecurity, and regulatory and environmental costs as material risks. A 10% increase in fuel cost was estimated to add approximately $170 million to 2018 fuel expense; no fuel hedges were outstanding at year-end.
- The planned Airbus cabin restyling faced lavatory-module quality issues, with prototype modifications beginning in early 2018. The company also continued a fleet review, including options for its E190 fleet. Pilot collective bargaining negotiations were ongoing; inflight crew unionization efforts were also noted.
- JetBlue planned to adopt the new revenue-recognition standard retrospectively in 2018. The filing estimated material changes to loyalty-program liabilities and classification of certain ancillary fees, while expecting less than a 1% reduction to reported operating revenue for the comparative years.
Investor verification priorities
- Separate recurring operating performance from the $570 million tax-remeasurement benefit when assessing earnings and EPS.
- Track fuel prices, fuel exposure without year-end hedges, CASM trends, and the extent to which fares and ancillary revenue can offset costs.
- Assess liquidity against the working capital deficit, planned capital expenditures, aircraft commitments, and share repurchases; review credit-facility covenants and available borrowing capacity.
- Monitor recovery in Puerto Rico and the Caribbean, hurricane-related revenue effects, and capacity plans for 2018.
- Verify execution of cost-saving initiatives, cabin modifications, fleet decisions, and labor negotiations, including any resulting costs or operational disruption.