JetBlue Airways Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Financial amounts below are in U.S. dollars; “$m” means millions.
Business context and reporting period
JetBlue carried 30.5 million passengers, operated an average of 800 daily flights, and served 82 destinations in 25 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and 15 Caribbean and Latin American countries. Its strategy centers on its Northeast-focused network, differentiated customer offering, cost discipline, and expansion in Boston, Fort Lauderdale, the Caribbean, and Latin America.
Financial and operating results
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $5,441m | $4,982m |
| Operating income / margin | $428m / 7.9% | $376m / 7.5% |
| Net income | $168m | $128m |
| Diluted earnings per share | $0.52 | $0.40 |
| Operating cash flow | $758m | $698m |
| Free cash flow (company-defined, non-GAAP) | $121m | $(127)m |
| Total debt and capital leases at year-end | $2,585m | $2,851m |
Revenue grew 9.2%; passenger revenue increased 9.3% to $4,971m and other revenue rose 8.8% to $470m. Passenger growth reflected increased capacity and yield. Average fare rose 3.9% to $163.19, while load factor edged down to 83.7% from 83.8%. Available seat miles increased 6.9%. Even More Space seats generated approximately $170m, up more than 13%.
Operating expenses increased 8.8% to $5,013m. Fuel remained the largest expense at $1,899m, or 37.9% of operating expenses; fuel consumption rose 7.3% while average fuel cost per gallon fell to $3.14 from $3.21. Maintenance expense increased 28.0% to $432m, principally from higher Embraer engine costs. Salaries, wages, and benefits rose 8.7% to $1,135m.
Fourth quarter: Revenue was $1,365m, operating income $115m, and net income $47m, compared with $1,194m, $44m, and $1m, respectively, in fourth-quarter 2012. Fourth-quarter 2013 diluted EPS was $0.14.
At year-end, cash and cash equivalents were $225m and investment securities totaled $516m, including $402m short-term. Management reported unrestricted cash, cash equivalents, and short-term investments of $627m, plus $550m of undrawn revolving facilities. Working capital was negative $818m. The company generated $121m of free cash flow after $615m of capital expenditures and $22m of aircraft pre-delivery deposits. Return on invested capital, a non-GAAP measure, improved to 5.3% from 4.8%.
Material changes versus the prior comparable period
- Net income rose $40m and operating margin improved 0.4 percentage points; operating revenue increased 9.2%.
- Operating expense per available seat mile increased 1.9% to 11.71 cents; excluding fuel and profit sharing, it rose 3.8% to 7.25 cents.
- Debt and capital lease obligations declined $266m. JetBlue prepaid approximately $94m of aircraft debt and increased unencumbered aircraft from 11 to 23.
- The company converted approximately $55m of Series A 5.5% convertible debentures into about 12.2 million common shares. It repurchased approximately 530,000 shares for about $3m during 2013.
- The fleet order book was revised: 24 Embraer 190 deliveries were deferred to 2020–2022, Airbus orders shifted toward larger A321 aircraft, and 35 additional A321-family aircraft were ordered.
Outlook, risks, contingencies, and unusual items
- For 2014, management forecast capacity growth of approximately 5%–7% and operating expense per available seat mile growth of 1%–3%, assuming fuel at $3.06 per gallon net of hedging. It expected nine A321 deliveries and planned to launch Mint premium transcontinental service in June and continue Fly-Fi installations.
- Fuel-price sensitivity is significant: a 10% increase in fuel cost per gallon was estimated to add approximately $202m to 2014 fuel expense. Year-end hedges covered about 9% of projected 2014 fuel needs; subsequent January hedges added coverage.
- Debt and fixed commitments remain substantial: debt and capital leases were $2.585bn, approximately 43% of debt had floating rates, and total disclosed contractual obligations were $15.38bn. Aircraft and flight-equipment commitments were approximately $6.87bn through 2022. Management identified a 2016 debt maturity peak of about $474m and said it expected liquidity to cover requirements for at least 12 months.
- Key operating risks include intense fare competition, fuel volatility, New York-area congestion and weather disruption, rising maintenance and labor costs, aircraft delivery and financing needs, and reliance on a limited number of aircraft, engine, and technology suppliers. The new pilot flight-duty rules took effect in January 2014; pilot labor costs were also expected to rise, including from a 20% base-pay increase over three years.
- The Air Line Pilots Association petitioned in February 2014 to represent JetBlue pilots; an election was scheduled for March–April 2014. A pilot employment-agreement arbitration claimants’ demand was $13m; JetBlue said it had accrued a probable amount and expected damages to be significantly lower. LiveTV customer WestJet alleged $15m in damages; the company disputed the allegations and said the loss likelihood could not yet be assessed.
- JetBlue accrued $2m for remediation of petroleum contamination found at JFK; preliminary estimated remediation costs ranged from $1m to $3m, and the company expected pollution insurance to mitigate most exposure. The filing says other ordinary-course legal matters could have outcomes materially different from current estimates.
- Unusual items included a $7m gain on LiveTV’s Airfone business sale, approximately $2m in gains from spare-engine sales, and a $3m loss on early debt extinguishment. The TrueBlue points change to non-expiring points reduced estimated breakage and increased the loyalty liability by approximately $5m.
Important facts for investors to verify
- Whether 2014 capacity, unit-cost, and fuel assumptions were achieved, and how fuel hedges and fuel prices affected actual results.
- Progress on the pilot representation election, pay increases, and arbitration; also the outcome and potential exposure of the WestJet dispute and JFK remediation.
- Whether operating cash flow and liquidity adequately fund the aircraft order book, capital spending, debt maturities, and other fixed commitments.
- Whether maintenance and labor costs continue to outpace revenue or capacity growth, and whether the revised fleet mix delivers expected cost and network benefits.
- JetBlue reported an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2013; verify subsequent filings for changes.