JetBlue Airways Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited results; comparisons are with the same 2015 periods unless noted.
Business context and financial performance
JetBlue provides air transportation in the United States, the Caribbean and Latin America. The company expanded capacity and passenger volumes during the quarter, while lower fares and yield constrained passenger-revenue growth.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $1.732 billion | $1.687 billion | $4.991 billion | $4.822 billion |
| Operating income | $354 million | $351 million | $1.016 billion | $886 million |
| Operating margin | 20.5% | 20.8% | 20.4% | 18.4% |
| Net income | $199 million | $198 million | $579 million | $487 million |
| Diluted EPS | $0.58 | $0.58 | $1.70 | $1.42 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1.317 billion | $1.294 billion |
Q3 revenue grew 2.6%; passenger revenue rose 1.3% as passengers increased 7.7%, partly offset by a 6.0% decline in average fare. Other revenue increased 17.9%, primarily reflecting the new co-branded credit card. Capacity (ASMs) increased 6.3%, load factor rose 1.0 percentage point to 86.3%, and operating revenue per ASM fell 3.5%.
For the first nine months, revenue increased 3.5% and net income rose approximately 19%. Passenger revenue grew 1.8% as passengers increased 9.7%, offset by a 7.2% decline in average fare. Other revenue grew 24.0%, principally reflecting bag fees introduced in 2015.
Costs, liquidity, debt and investment
- Q3 operating expense was $1.378 billion, up 3.0%; expense per ASM declined 3.1% to 9.99 cents, largely on lower fuel costs and higher capacity. Excluding fuel, profit sharing and related taxes, cost per ASM increased 3.1% to 7.53 cents.
- Q3 fuel expense fell 14.4% to $293 million as average fuel cost declined 20.0% to $1.48 per gallon; consumption increased 7.0%. Salaries and benefits, maintenance, and depreciation increased, reflecting additional staffing, flying and aircraft.
- Nine-month fuel expense decreased 25.4% to $782 million, principally due to the average fuel cost falling to $1.37 per gallon from $2.01. Fuel savings were partly offset by higher consumption. Nine-month cost per ASM excluding fuel, profit sharing and related taxes decreased 0.4% to 7.55 cents.
- Operating cash flow was $1.317 billion for nine months. Investing activities used $630 million and financing activities used $132 million; cash and equivalents increased $555 million to $873 million. Capital expenditures were $480 million, with a further $118 million in aircraft pre-delivery deposits.
- At September 30, unrestricted cash and cash equivalents were $873 million and short-term investments were $581 million. Management reported approximately $600 million of undrawn credit lines and 70 unencumbered aircraft and 32 unencumbered spare engines. Working-capital deficit was $497 million, down from $902 million at December 31, 2015; management expected resources to cover requirements for at least 12 months.
- Balance-sheet current maturities of debt and capital leases were $439 million and long-term debt and capital lease obligations were $1.250 billion. The filing reports $1.960 billion of contractual debt and capital-lease payments, including estimated interest. Aircraft and other property with a net book value of $2.8 billion secured borrowings. JetBlue said it was in compliance with debt and lease covenants.
- Contractual obligations totaled $15.593 billion, including $8.321 billion of aircraft purchase obligations and $1.381 billion of lease commitments. Operating lease obligations are not reflected on the balance sheet. Non-aircraft capital expenditures were expected to be $150–$200 million for full-year 2016.
Material changes, outlook and risks
- Management forecast Q4 2016 capacity growth of 3.0%–5.0% and CASM excluding fuel and profit sharing growth of 4.5%–6.5% year over year. Both ranges include an estimated approximately half-point adverse impact from Hurricane Matthew. For full-year 2016, capacity growth was expected at 8.5%–9.0% and CASM excluding fuel and profit sharing at 0.0%–1.5% growth.
- JetBlue added 30 Airbus A321 aircraft to its purchase agreement, with deliveries scheduled from 2017 through 2023, including 15 A321neo aircraft from 2020. It also expected five A321 deliveries during the remainder of 2016. Aircraft commitments and growth plans increase future capital and fixed-cost requirements.
- Management highlighted expansion in Boston and Fort Lauderdale, new routes and planned Mint service expansion. Scheduled service to Havana, Camagüey and Holguín was expected to begin in Q4 2016. The company reported its first commercial U.S. flight to Cuba in 50 years during the quarter.
- From January 1, 2017, eligible non-management crewmembers were to receive an 8% raise and a modified profit-sharing plan. Management said the changes were intended to keep compensation fair and competitive.
- Fuel-price exposure remains significant: a hypothetical 10% increase in fuel cost was estimated to raise fuel expense by approximately $120 million over the next 12 months after hedging. JetBlue reported hedging approximately 12% of projected 2016 and 10% of projected 2017 fuel requirements; hedge contracts outstanding at quarter-end settle by December 31, 2017.
- Other cited risks include intense competition, fuel and maintenance-cost volatility, financing availability, weather disruptions, congestion in the New York and Boston markets, labor costs, technology and cybersecurity risks, and geopolitical or public-health events. Q3 on-time performance fell to 73.9% from 77.8%; management cited Northeast airspace congestion. Completion factor was 98.9%, versus 99.3%.
- Legal claims arise in the ordinary course; JetBlue said outcomes are uncertain and an uninsured or excess-insurance judgment could be material, though such matters had not materially affected operations or financial condition to date. No material risk-factor changes from the 2015 Form 10-K were reported.
- Subsequent events: the remaining approximately $86 million principal amount of convertible debentures was repurchased in a transaction that closed October 17, 2016. In October, JetBlue also entered agreements to buy out four aircraft leases for more than $70 million, with completion anticipated in Q4.
Important facts for investors to verify
- Whether fare, yield and revenue-per-ASM pressure persists as capacity expands, and how passenger demand and load factor develop.
- Actual Q4 and full-year capacity and cost performance versus management’s guidance, including the effects of Hurricane Matthew and labor-cost increases.
- Fuel-price movements, realized hedge results and the adequacy of liquidity if fuel costs or other operating expenses rise.
- Financing terms and cash requirements for the substantial aircraft order book, lease obligations and other contractual commitments.
- The completion and financial effects of the convertible-debt repurchase and aircraft lease buyouts, and whether future debt repayment or aircraft financing alters leverage and liquidity.