JetBlue Airways Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $1.195bn | $1.030bn | $3.358bn | $2.841bn |
| Operating income | $108m | $140m | $239m | $278m |
| Net income | $35m | $59m | $63m | $89m |
| Diluted EPS | $0.11 | $0.18 | $0.21 | $0.28 |
| Operating margin | 9.0% | 13.6% | 7.1% | 9.8% |
Revenue increased, but profits and margins declined as operating costs—especially fuel and maintenance—rose faster. Q3 passenger revenue increased 17%; capacity grew 8%, yield rose 8%, and average fare increased 9% to about $155. Q3 operating revenue per available seat mile (RASM) rose 7% to 12.12 cents. Operating expense per available seat mile (CASM) increased 13% to 11.03 cents; excluding fuel, CASM fell 2% to 6.43 cents.
For the first nine months, revenue rose 18%, while operating expenses rose 22%. Capacity increased 6%, yield increased 10%, and RASM rose 11% to 12.08 cents. CASM increased 15% to 11.22 cents; excluding fuel, it increased 2% to 6.74 cents.
Cash flow: Nine-month operating cash flow was $500m, versus $490m. Investing cash outflow was $345m, compared with $659m, including $312m of capital expenditures and $43m of aircraft pre-delivery deposits. Financing provided $12m, versus $229m used in the prior period. Cash and cash equivalents increased $167m to $632m.
Liquidity: At September 30, cash and cash equivalents were $632m and current investment securities were $578m; management reported working capital of $316m. The company said available liquidity and expected cash generation should cover requirements for at least 12 months. Restricted cash was $64m in noncurrent assets.
Debt and obligations: The balance sheet reported $193m of current maturities of long-term debt and capital leases and $2.864bn of long-term debt and capital lease obligations. The weighted-average interest rate on long-term debt was 4.55%. Nine-month principal payments reduced debt and capital lease obligations by $166m; the company also issued about $189m of equipment notes and repurchased $32m principal of 6.75% convertible debentures for about $37m, recording a $5m loss. Total contractual obligations were $15.577bn, including $7.045bn of flight-equipment commitments.
Material changes and management commentary
- Fuel expense increased 55% in Q3 and 51% for the first nine months. Average fuel cost was $3.25 per gallon in Q3 and $3.18 for the nine-month period, against $2.26 and $2.25, respectively, in 2010.
- Maintenance materials and repairs increased 35% in Q3 and 33% year to date, attributed to fleet growth, aging aircraft, and aircraft coming off warranty. Average fleet age rose to 5.9 years from 5.1 years a year earlier.
- Hurricane Irene caused about 1,400 cancellations over three days, disrupting New York and Boston operations. Q3 completion factor was 97.2%, compared with 99.2%; on-time performance was 72.4%, compared with 76.9%.
- Management emphasized growth in Boston, the Caribbean, and Latin America, alongside efforts to attract more business travelers and expand commercial partnerships. It expected to begin service to additional Caribbean and Central American destinations late in 2011.
- Fleet plans changed after the quarter: Airbus orders were restructured to include 30 A321s and 40 A320neo aircraft, while EMBRAER 190 orders were cancelled, deferred, or terminated. The filing reported $7.045bn of flight-equipment commitments, mostly due after 2015, and noted financing for later deliveries was not assured on attractive terms, or at all.
Outlook, risks, and unusual items
- Management expected full-year 2011 capacity to increase approximately 6%–8% over 2010. Assuming fuel at $3.19 per gallon, including taxes and net of effective hedges, it forecast 2011 CASM to increase 13%–15%, mainly due to fuel and maintenance costs.
- JetBlue reported fuel hedges covering approximately 45% of forecast fourth-quarter 2011 consumption and 21% of forecast 2012 consumption. A hypothetical 10% increase in fuel cost was estimated to raise annual fuel expense by approximately $180m. Fuel prices and availability remain highly volatile; hedge results and accounting effectiveness may vary.
- In October 2011, a winter storm led to diversions and tarmac delays exceeding DOT limits at Bradley International Airport. The DOT was investigating, and a penalty was possible.
- In October 2011, CFO Edward Barnes resigned; Senior Vice President–Treasurer Mark Powers was appointed interim CFO and Treasurer.
- Spare-parts collateral ratios were not met in Q3 because of lower inventory valuations. JetBlue pledged a spare engine and elected to redeem $3m of equipment notes, to be settled in November 2011.
- The new American Express fuel-purchasing line permits up to $125m of borrowing, subject to weekly limits and financial covenants. JetBlue reported $41m borrowed as of October 31, 2011 and compliance with the covenants as of September 30.
- Other risks identified include airline competition, economic weakness, financing availability, significant fixed obligations, maintenance and interest-rate increases, operational disruption, labor organizing, information-security breaches, and dependence on the New York market. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether fares and unit revenue can continue to outpace fuel, maintenance, and other cost increases—and the impact on margins.
- Actual fuel prices, hedge coverage and settlements, and exposure to the disclosed $180m fuel-cost sensitivity.
- Funding and financing terms for the substantial aircraft commitments, and the effect of fleet changes on future capacity and fixed costs.
- The status and possible consequences of the DOT tarmac-delay investigation, as well as any costs from weather-related disruption.
- Compliance with debt and credit-facility covenants, collateral requirements, and liquidity needs, including developments following the CFO transition.