JetBlue Airways Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. JetBlue provides air transportation across the United States, Caribbean and Latin America; amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $1.813B | $1.732B | $5.259B | $4.991B |
| Operating income | $310M | $354M | $811M | $1.016B |
| Operating margin | 17.1% | 20.5% | 15.4% | 20.4% |
| Net income | $179M | $199M | $475M | $587M |
| Diluted EPS | $0.55 | $0.58 | $1.43 | $1.72 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.066B | $1.317B |
- Q3 revenue increased 4.7%, led by passenger revenue growth of 3.3% and other revenue growth of 18.2%, primarily from the co-branded credit card and loyalty program. Capacity (ASMs) rose 3.7%; load factor declined 1.2 percentage points to 85.1%.
- For the first nine months, revenue rose 5.4%; operating expenses increased 11.9%. Higher fuel, labor, maintenance and depreciation costs contributed to lower operating income and profit versus 2016.
- Q3 operating expense per ASM rose 5.2% to 10.50 cents; excluding fuel and specified non-airline expenses, it increased 2.7% to 8.07 cents. Nine-month figures were up 7.4% and 3.7%, respectively.
- Fuel expense increased 18.3% in Q3 and 27.1% year to date. Average fuel cost was $1.69 per gallon in Q3 versus $1.48, and $1.66 year to date versus $1.37.
- Operating cash flow fell year over year, which management attributed principally to lower earnings and higher fuel, labor and maintenance costs. Capital expenditures were $705M, with $90M of aircraft predelivery deposits, for the nine months.
Financial position and liquidity
- At September 30, 2017, cash and cash equivalents were $394M and investment securities were $420M, totaling $814M of unrestricted cash, equivalents and short-term investments. JetBlue also reported approximately $625M of undrawn credit lines.
- Current liabilities exceeded current assets by approximately $1.0B, compared with an $811M working-capital deficit at December 31, 2016. JetBlue said this is customary in the airline industry, in part because air traffic liability is current.
- Current maturities of debt and capital leases were $224M; long-term debt and capital lease obligations were $1.031B. JetBlue reported no borrowings on its two disclosed credit lines and said it was in compliance with debt and lease covenants.
- Debt and capital lease repayments were $138M for the nine months. The company reported 110 unencumbered aircraft and 37 unencumbered spare engines. Moody’s upgraded its debt rating to Ba1 from Ba3 in June 2017, with a stable outlook.
- Financing cash outflow included $390M of treasury-stock purchases. The share repurchase program was completed during Q3; year-to-date share repurchases totaled $380M in cash payments, according to management.
Material developments, outlook and risks
- Hurricanes: Irma and Maria caused more than 3,000 flight cancellations and over 33 days of interrupted service. Management estimated Q3 revenue was reduced by about $44M and operating income by about $33M. Systemwide on-time performance fell to 68.8% from 73.9%, and completion factor to 95.3% from 98.9%.
- Guidance: For Q4 2017, JetBlue expected capacity growth of 4.5%–5.5% and CASM excluding fuel growth of 5.0%–7.0% year over year. For full-year 2017, it expected capacity growth of 4.0%–5.0% and CASM excluding fuel growth of 4.0%–5.0%. Hurricane impacts were included in these estimates.
- Network and fleet: Management continued to target growth in focus cities, particularly Boston and Fort Lauderdale, and expected new routes in 2018. Firm orders totaled 126 aircraft and spare engines, with $7.622B of flight-equipment purchase obligations. Management said aircraft financing availability and terms are not assured; fixed costs will rise as the fleet expands regardless of financing method.
- Fuel exposure: Approximately 10% of projected fuel use was hedged as of September 30; existing hedge contracts settled by year-end. A hypothetical 10% rise in fuel prices was estimated to increase fuel expense by about $159M over the next 12 months.
- Accounting change: JetBlue planned to adopt the new revenue standard on January 1, 2018 using full retrospective adoption. It estimated that the loyalty-program accounting change could increase air traffic liability by approximately $250M–$350M at the beginning of the retrospective period; the impact of other changes was still being evaluated.
- Other risks and contingencies: The filing cites fuel-price volatility, competition, labor and maintenance costs, Northeast congestion, weather, financing access, operational disruptions, cyber risks and regulatory or geopolitical events. Ordinary-course legal matters could result in material losses, though none had materially affected operations or financial condition to date. Management said liquidity was adequate for at least the next 12 months.
Important facts for investors to verify
- Whether the Q4 and full-year capacity and CASM-ex-fuel guidance was achieved, and how much cost growth was temporary hurricane-related versus ongoing.
- Subsequent trends in fuel prices, hedge coverage and operating margins; the filing’s sensitivity estimate assumes a hypothetical fuel-price increase.
- Cash generation and liquidity after substantial share repurchases, aircraft spending and scheduled debt and lease payments.
- Aircraft-order financing, delivery timing and resulting fixed-cost and leverage implications.
- The final transition effects of the 2018 revenue standard, especially the loyalty liability estimate and revenue classification changes.
- Any material developments in legal proceedings, operational reliability or the risks identified in the filing.