JetBlue Airways Corporation — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. JetBlue primarily provides air transportation in the United States, the Caribbean and Latin America; about 80% of operations were concentrated in the U.S. Northeast.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Operating revenue | $1.349 billion | $1.299 billion; up 3.8% |
| Operating income / margin | $41 million / 3.1% | $59 million / 4.5% |
| Net income | $4 million | $14 million |
| Diluted EPS | $0.01 | $0.05 |
| Operating expense per available seat mile (ASM) | 12.55 cents | 12.23 cents; up 2.6% |
| CASM excluding fuel and profit sharing | 8.10 cents | 7.62 cents; up 6.3% |
| Operating cash flow | $322 million | $205 million |
| Investing / financing cash flow | $(46) million / $0 | $(2) million / $(39) million |
Passenger revenue rose 3.6% to $1.230 billion; other revenue increased 5.9% to $119 million. Average fare increased 3.2%, while passenger volume rose 0.4%. ASMs increased 2.7%, but load factor declined 0.8 percentage points to 83.1%. Fuel expense was $464 million, down 0.8%; average fuel cost fell to $3.14 per gallon from $3.29.
At March 31, cash and cash equivalents were $501 million and short-term investments were $270 million, totaling $771 million in unrestricted cash, equivalents and short-term investments; undrawn credit lines were $550 million. Working capital was negative $619 million. Balance-sheet long-term debt and capital lease obligations were $2.332 billion, with $307 million of current maturities. The company reported a 4.5% weighted-average interest rate on long-term debt and capital lease obligations. Operating cash flow benefited in part from $213 million of changes in certain operating assets and liabilities. Capital expenditures were $158 million, with a further $32 million of flight-equipment deposits.
Material changes and management commentary
- Severe Northeast winter weather led to approximately 4,100 flight cancellations, nearly twice the cancellations for all of 2013. Management said cancellations reduced seat and ancillary revenue and increased hourly employee costs. On-time performance was 77.2%, versus 73.3%; completion factor was 98.0%, versus 98.5%.
- Salaries, wages and benefits rose 17.7% to $329 million, reflecting pilot pay increases, additional pilot staffing under revised FAA duty and rest rules, weather-related staffing costs and 5.3% more full-time-equivalent employees. Depreciation and amortization rose 13.8%, principally with fleet growth. Maintenance expense fell 17.8%, in part because Q1 2013 included unexpected E190 engine work.
- JetBlue completed a $75 million purchase of 24 Reagan National Airport slots and planned new service beginning June 2014, subject to government operating authority for Nassau. It also continued schedule and frequency adjustments.
- In March, JetBlue announced the proposed sale of wholly owned LiveTV to Thales for $400 million, subject to approvals and expected to close in mid-2014. Management anticipated a gain and said proceeds were expected to support debt reduction and ROIC-accretive growth.
- JetBlue issued $248 million of equipment notes and repaid $237 million of debt and capital lease obligations during the quarter, including the final $188 million payment on Series 2004-1 EETC. The company reported 21 unencumbered aircraft and 30 unencumbered spare engines at quarter-end.
Outlook, commitments and risks
- For 2014, management forecast capacity growth of approximately 4%–6% over 2013 and full-year CASM excluding fuel and profit sharing growth of 3.5%–5.5%. It planned to add eight A321 aircraft during the remainder of the year.
- Aircraft and related flight-equipment commitments totaled approximately $6.8 billion through 2022; total noncancelable contractual obligations were reported at $14.830 billion. Management said the company expected to meet cash requirements for at least the next 12 months, while noting financing for future aircraft deliveries might not be available on attractive terms.
- A hypothetical 10% increase in fuel prices was estimated to raise 2014 fuel expense by approximately $207 million, after considering hedges. JetBlue had hedged approximately 13% of projected 2014 fuel requirements as of March 31. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by about $10 million.
- Approximately 74% of pilots voted for ALPA representation in April 2014; negotiations for a first collective bargaining agreement were expected. Management warned that unionization or unsuccessful negotiations could raise labor costs or disrupt operations.
- Environmental remediation at JFK was preliminarily estimated at $1 million–$3 million; $2 million was accrued, and the company said pollution insurance could mitigate exposure. A group of pilots revised its arbitration damages claim to $5 million; the company had accrued an amount it considered probable, but the filing does not state that amount. LiveTV faced a WestJet breach-of-contract claim alleging $15 million plus unspecified damages; the outcome could not yet be assessed.
- Other risks cited include fuel-price volatility, competition, operating concentration and congestion in the Northeast, substantial fixed obligations and debt, aircraft financing availability, labor costs, weather disruption and economic or geopolitical conditions. Management cautioned that quarterly results may fluctuate and that Q1 performance is not necessarily indicative of the full year.
Important facts for investors to verify
- Whether LiveTV’s $400 million sale closed, the final gain and use of proceeds.
- Whether revenue and margins recover from winter disruption and elevated labor costs, and whether the stated capacity and CASM outlook is achieved.
- Aircraft delivery funding needs, debt maturities (including the disclosed 2016 peak), liquidity and planned capital spending.
- Fuel-price exposure, hedge coverage and the effect of fuel-market changes on costs.
- Developments in ALPA negotiations, the pilot arbitration, the WestJet dispute and JFK remediation costs.