JetBlue Airways Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Dollar amounts are in millions unless otherwise stated.
Business context
JetBlue operated a point-to-point passenger airline and its LiveTV in-flight entertainment subsidiary. At year-end it served 75 destinations with a fleet of 180 Airbus A320 and Embraer 190 aircraft. Its network remained concentrated in the New York metropolitan area, Boston, Florida, and the Caribbean and Latin America.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $4,982 | $4,504 |
| Operating income / margin | $376 / 7.5% | $322 / 7.1% |
| Net income | $128 | $86 |
| Diluted earnings per share | $0.40 | $0.28 |
| Cash from operating activities | $698 | $614 |
| Year-end debt | $2,851 | $3,136 |
- Revenue rose 10.6%, led by passenger revenue, which increased 11.5% to $4,550. Average fare increased 1.5% to $157.11; load factor rose to 83.8% from 82.4%; capacity increased 7.6%.
- Fuel expense was $1,806, about 39% of operating expenses. Average fuel cost was $3.21 per gallon, versus $3.17; consumption increased to 563 million gallons from 525 million.
- Maintenance materials and repairs rose 48.4% to $338, reflecting fleet growth and aging, aircraft coming off warranty, and the liquidation of a maintenance provider. Salaries, wages and benefits increased 10.3% to $1,044.
- Operating expense per available seat mile was 11.49 cents, up 2.3%; excluding fuel, it rose 3.3% to 6.99 cents. Return on invested capital improved to 4.8% from 4.1%.
- Cash and cash equivalents were $182 at year-end, with $549 of short-term and $136 of long-term investment securities. Unrestricted cash, cash equivalents and short-term investments equaled approximately 15% of trailing revenue. Working capital was negative $508, versus positive $216 in 2011.
- JetBlue generated $698 of operating cash flow but used $867 in investing activities, principally for aircraft, deposits and other capital spending. It reduced debt by $285 during the year. Available credit lines totaled up to $325 and were undrawn at year-end.
Material changes and Q4 results
- Full-year operating income increased $54 and net income increased $42 versus 2011. Revenue growth and higher fares and capacity supported results; higher fuel, maintenance and labor costs partially offset the gains.
- Q4 revenue was $1,194, operating income $44, and net income $1. Operating margin was 3.7%, compared with 8.6% in Q3. Hurricane Sandy reduced Q4 operating income by approximately $30 and led to about 1,700 flight cancellations over six days.
- Even More Space generated approximately $150 of 2012 revenue, up about 19%. The company added eight airline partnerships, bringing its total to 22, and repurchased approximately 4.1 million shares for about $23.
Outlook, risks and contingencies
- For 2013, management forecast capacity growth of approximately 5.5%–7.5% and CASM growth of 1.5%–3.5%, assuming fuel at $3.24 per gallon net of hedging. It targeted improved year-over-year margins and shareholder returns; these are forward-looking expectations, not guarantees.
- JetBlue had approximately $5.0 billion of aircraft and flight-equipment commitments through 2021. Total contractual obligations were $12.862 billion, and scheduled debt maturities peaked in 2014 at approximately $572 million. About 40% of debt had floating rates; management estimated a 100-basis-point rate increase would add about $15 million to 2013 interest expense.
- Fuel-price volatility, intense fare competition, rising maintenance and labor costs, operational disruption from weather and congested Northeast airports, and dependence on the New York market are prominent risks. A 10% fuel-price increase was estimated to add approximately $190 million to annual fuel expense at projected 2013 consumption.
- The DOT was investigating 2011 tarmac delays involving five diverted flights; the filing said a penalty could reach approximately $15 million, with no final determination reported. A pilot employment-agreement arbitration involving approximately 944 current and 26 former pilots was scheduled for March 2013; damages were unspecified and could be material. JetBlue accrued $2 million for environmental remediation at JFK, with preliminary estimated costs ranging from less than $1 million to approximately $3 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure and financial-reporting controls at year-end.
Important facts for investors to verify
- Whether 2013 capacity, margin and unit-cost expectations were achieved, and how actual fuel prices and hedging affected results.
- Whether maintenance and labor expense continued to rise as the fleet aged, and whether expected maintenance agreements contained costs.
- Available liquidity after aircraft prepayments, capital spending and debt maturities, including access to aircraft financing and credit lines.
- Outcomes and financial effects of the DOT tarmac-delay investigation, pilot arbitration and JFK environmental remediation.
- Whether aircraft commitments and growth investments generated returns consistent with management’s stated ROIC and profitable-growth objectives.