JetBlue Airways Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
JetBlue is a U.S. airline. In the third quarter, capacity (available seat miles, or ASMs) grew 5.1%; revenue passengers increased 4.0%, average fare rose 6.5%, and load factor edged up to 85.0% from 84.8%. Management reported the company’s fourteenth consecutive quarter of net income.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1.442bn | $1.308bn | $4.076bn | $3.788bn |
| Operating income | $152m | $113m | $313m | $332m |
| Operating margin | 10.5% | 8.6% | 7.7% | 8.8% |
| Net income | $71m | $45m | $121m | $127m |
| Diluted EPS | $0.21 | $0.14 | $0.38 | $0.39 |
| Operating expense per ASM | 11.47¢ | 11.16¢ | 11.71¢ | 11.44¢ |
| CASM excluding fuel and profit sharing | 6.95¢ | 6.63¢ | 7.23¢ | 6.89¢ |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $565m, versus $541m a year earlier. Investing cash outflow was $340m and financing cash outflow was $34m. Capital expenditures were $342m.
- At September 30, cash and cash equivalents were $373m and short-term investments were $581m, totaling $954m in unrestricted cash and short-term investments. Management said this equaled approximately 18% of trailing-twelve-month revenue.
- Working capital deficit was $651m, compared with $508m at December 31, 2012. The filing notes that air traffic liability is a customary current liability for airlines; the deficit also included $308m of debt due in Q1 2014 and $86m of investment securities classified as long-term.
- Balance-sheet current maturities of long-term debt and capital leases were $636m; long-term debt and capital lease obligations were $2.206bn. Scheduled debt maturities were expected to peak in 2014 at nearly $592m. JetBlue reported no outstanding balance on its credit facilities at quarter-end and compliance with covenants.
- Total contractual obligations were $15.680bn, including $7.080bn of flight-equipment purchase obligations. JetBlue had $350m of revolving credit capacity, plus a separate $200m line of credit.
Material changes and management commentary
- Q3 revenue increased 10.4%, led by passenger revenue growth of 10.8%; higher fares and passenger volume contributed. Operating income rose $39m year over year. For the nine-month period, revenue grew 7.6%, but operating income fell $19m and net income fell $6m.
- Maintenance materials and repairs rose 28.0% in Q3 and 29.5% for nine months, reflecting fleet growth and aging, heavier maintenance checks, and EMBRAER 190 engine work. Management said engine maintenance costs had leveled off from earlier 2013 highs and that a flight-hour-based agreement should improve expense forecasting.
- Fuel expense increased 4.2% in Q3 and 5.1% for nine months, primarily as consumption grew; average fuel cost per gallon declined to $3.14 from $3.17 in Q3 and to $3.16 from $3.21 year to date. Salaries and benefits, depreciation, and other operating costs also increased.
- Management forecast 2013 capacity growth of approximately 5.5%–7.5% versus 2012. Assuming fuel at $3.13 per gallon net of hedging, it expected full-year CASM excluding fuel and profit sharing to rise 2.5%–4.5%, mainly due to fleet-age-related maintenance and EMBRAER 190 engine restorations.
- Planned initiatives included Mint premium transcontinental service starting in June 2014, additional route launches, and fleet changes announced in October 2013. Those changes deferred 24 EMBRAER 190 deliveries to 2020–2022 and shifted orders toward larger A321/A321neo aircraft.
Risks, contingencies and unusual items
- JetBlue estimated that a 10% increase in fuel prices, after hedging, would increase fuel expense by approximately $203m based on projected consumption. About 27% of remaining 2013 fuel requirements were hedged using swaps and caps; additional volumes were managed through fixed forward price agreements.
- Variable-rate debt and capital leases totaled $1.041bn. Management estimated that a 100-basis-point increase in interest rates would raise annual interest expense by approximately $14m.
- A pilot pay arbitration remained unresolved. The arbitrator had ruled that a 2007 pay increase triggered a contract provision; some claims were dismissed and the damages scope was limited, but further proceedings continued. JetBlue accrued $3m and said it could not estimate possible losses beyond that amount; an adverse outcome could be material.
- At JFK Terminal 6, suspected subsurface petroleum contamination had estimated remediation costs ranging from less than $1m to approximately $3m. JetBlue accrued $2m and cited pollution insurance, while noting the extent remained uncertain.
- In October, the DOT closed its investigation into five 2011 tarmac delays without a fine or penalty. JetBlue also identified potential impacts from future federal budget constraints, including FAA staffing reductions and operational delays.
- Unusual items included $4m of maintenance expense and $2m of other operating expense recorded in the first half of 2013 for prior years, and a $5m reduction in revenue from a TrueBlue points-breakage estimate change. JetBlue cautioned that quarterly results may fluctuate and are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether higher fares and passenger demand continue to offset rising maintenance, labor, and other unit costs.
- Progress on EMBRAER 190 engine maintenance, fleet reliability, and the projected 2013 cost guidance.
- Funding and cash requirements for aircraft orders and the JFK T5i project, alongside the 2014 debt maturity peak and working-capital deficit.
- Developments in the pilot arbitration and JFK environmental investigation, including potential exposure beyond recorded accruals.
- Fuel-price and interest-rate sensitivity, the execution of hedges, and the impact of any renewed government-related air-traffic disruption.