Business context and reporting period
JetBlue Airways Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, with comparisons to 2016. The airline serves the United States, Caribbean, and Latin America.
Financial and operating results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1.842 billion | $1.643 billion | $3.446 billion | $3.260 billion |
| Operating income | $354 million | $313 million | $501 million | $662 million |
| Net income | $211 million | $181 million | $296 million | $388 million |
| Diluted EPS | $0.64 | $0.53 | $0.88 | $1.14 |
| Operating margin | 19.2% | 19.1% | 14.5% | 20.3% |
| Operating expense per ASM | 10.45 cents | 9.78 cents | 10.59 cents | 9.76 cents |
| Operating expense per ASM, excluding fuel | 8.16 cents | 7.76 cents | 8.25 cents | 7.92 cents |
Q2 revenue increased 12.1%, supported by higher passenger volume and fares, capacity growth, and higher other revenue. Passenger revenue rose 11.0%; other revenue rose 22.8%, primarily due to loyalty revenue from the co-brand credit card. Q2 yield per passenger mile increased 5.7%, average fare 4.0%, and capacity 4.8%. For the first half, revenue increased 5.7%, while net income declined 23.7%; higher fuel, labor, and maintenance costs contributed to the decline.
Fuel expense increased 18.5% in Q2 and 32.4% in the first half. Average fuel price was $1.61 per gallon in Q2, up 12.3%, and $1.65 in the first half, up 26.3%. First-half salaries, wages, and benefits rose 9.5%; maintenance materials and repairs rose 15.9%. Management cited higher fuel prices, additional aircraft and employees, wage increases, and challenging operating conditions as cost drivers.
Operating cash flow was $872 million for the first half, versus $1.007 billion in 2016. Investing cash outflow was $431 million, including $519 million of capital expenditures and $65 million of aircraft predelivery deposits. Financing cash outflow was $324 million, including $260 million of treasury-stock purchases and $84 million of debt and lease repayments. The company reported $286 million of free cash flow; this is a non-GAAP measure.
At June 30, 2017, cash and cash equivalents were $550 million and investment securities were $470 million. Management reported approximately $1.0 billion of unrestricted cash, cash equivalents, and short-term investments, plus approximately $625 million of undrawn credit lines. Working capital deficit was $1.0 billion, compared with $811 million at year-end 2016. Debt and capital lease obligations were approximately $1.305 billion, including $228 million of current maturities. Stockholders’ equity was $4.080 billion.
Material changes, outlook, and risks
- Q2 operating income rose $41 million year over year, but first-half operating income fell $161 million. First-half operating margin declined 5.8 percentage points.
- Q2 on-time performance fell to 69.0% from 78.9%; completion factor was 98.1% versus 99.4%. JetBlue attributed delays to Northeast congestion, runway construction at JFK and Boston Logan, and elevated air-traffic-control delays.
- For Q3 2017, management expected capacity growth of 6.5% to 7.5%, revenue per ASM to change between -0.5% and +2.5%, and CASM excluding fuel to increase 1.5% to 3.5% year over year. For full-year 2017, it expected capacity growth of 5.5% to 6.5% and CASM excluding fuel growth of 2.0% to 3.5%.
- JetBlue planned continued growth in focus cities, particularly Boston and Fort Lauderdale, and additional Mint service. It expected nine Airbus A321 aircraft to enter the operating fleet during the remainder of 2017.
- Aircraft purchase commitments totaled $7.805 billion; total disclosed contractual obligations were $14.490 billion. Management said aircraft financing might not be available on attractive terms and that fixed costs would rise regardless of financing method. It expected non-aircraft capital expenditures of approximately $150 million to $175 million for 2017.
- Fuel-price sensitivity: a hypothetical 10% increase in fuel cost was estimated to raise fuel expense by approximately $128 million over the next 12 months. About 10% of projected 2017 fuel requirements were hedged; existing hedge contracts settled by year-end.
- Management expected adequate liquidity for at least the next 12 months, but cited risks including fuel-price volatility, competition, congestion, weather, economic conditions, labor costs, financing availability, and operational disruptions. It reported no material change to previously disclosed risk factors. Pending legal matters could result in material losses, although the company said none had materially affected operations or financial condition to date.
- JetBlue anticipated adopting the new revenue standard on January 1, 2018, potentially retrospectively. It expected a significant increase in the TrueBlue points liability and changes in the timing and classification of certain ancillary-fee revenue. The company was still evaluating the impact of the new lease standard.
- Moody’s upgraded JetBlue’s debt rating to Ba1 from Ba3 in June 2017, with a stable outlook. The company repurchased shares through accelerated repurchase agreements; first-half cash flows show $260 million of treasury-stock purchases.
Important facts for investors to verify
- Whether Q3 and full-year capacity, revenue-per-ASM, and CASM-ex-fuel expectations were achieved, and how fuel prices affected results.
- Whether Q2 reliability and on-time performance recovered, given the operational disruptions and Northeast concentration.
- How aircraft commitments, financing needs, lease obligations, and share repurchases affect liquidity, leverage, and returns.
- The actual financial effects of adopting the revenue and lease accounting standards, particularly the TrueBlue liability and ancillary-fee recognition changes.
- Whether working capital, operating cash generation, and the stated 12-month liquidity assessment remain adequate as costs and contractual obligations evolve.