JetBlue Airways Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing; fourth-quarter results are also summarized below. Unless stated otherwise, dollar amounts are in millions.
Business context
JetBlue operated a point-to-point passenger airline with 160 aircraft at year-end, serving 63 destinations and averaging more than 650 daily flights. Its largest operating concentration was the New York metropolitan area; approximately 23% of capacity served the Caribbean and Latin America. Wholly owned LiveTV sells and services in-flight entertainment systems for other airlines.
Financial and operating performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Operating revenue | $3,779 | $3,292 |
| Operating income / margin | $333 / 8.8% | $285 / 8.6% |
| Net income | $97 | $61 |
| Diluted EPS | $0.31 | $0.21 |
| Cash from operations | $523 | $486 |
| Cash used in investing activities | $(696) | $(457) |
| Cash and cash equivalents at year-end | $465 | $896 |
| Total debt and capital leases | $3,033 | $3,304 |
- Revenue rose 15%, driven largely by a 16% increase in passenger revenue. Capacity grew 7%; average fare increased 8% to $140.69, yield rose 7%, and load factor increased 1.7 percentage points to 81.4%.
- Operating expenses increased 15% to $3,446. Fuel expense rose 18% to $1,115 as average fuel cost increased 10% to $2.29 per gallon and consumption grew. Fuel represented 32.4% of operating expenses, versus 31.4% in 2009.
- Operating expense per available seat mile was 9.92 cents, up 7%; excluding fuel it rose 6% to 6.71 cents. Salaries and benefits, marketing, maintenance, and other operating expenses also increased.
- Year-end working capital was $275, down from $377. Cash plus short-term investments totaled $960; long-term investments were an additional $133. Management said liquidity should meet cash needs for at least 12 months.
- Debt was 65% of total capitalization, according to the filing. Contractual obligations totaled $13.1 billion, including debt and capital leases, operating leases, aircraft commitments, and other financing obligations.
Fourth quarter: Revenue was $938 versus $833 in Q4 2009; operating income was $55 versus $65; net income was $8 versus $11. Q4 2010 operating margin was 6.0%.
Material changes versus prior period
- Net income increased to $97 from $61, and operating margin edged up to 8.8% from 8.6%, despite higher fuel and other operating costs.
- Cash from operations increased $37, but cash and cash equivalents fell by $431 during 2010. Investing cash outflow included substantial net purchases of investment securities as well as capital spending.
- Debt and capital leases declined to $3,033 from $3,304, including repayment of approximately $156 of 3.75% convertible debentures in 2010.
- JetBlue deferred 16 Airbus deliveries to 2015–2016, cancelled two Embraer orders, and leased six used A320s. It ended the year with 109 firm aircraft orders scheduled through 2018 and commitments of about $4.36 billion for aircraft and flight equipment.
- Cash and short-term investment composition shifted: cash declined from $896 to $465 while short-term investments rose from $240 to $495. JetBlue reported that it no longer held auction-rate securities at year-end.
Outlook, risks, contingencies, and unusual items
- 2011 outlook: Management expected capacity growth of approximately 7%–9%, with four net additional A320s and four E190s, principally deployed in Boston and Caribbean markets. At an assumed fuel price of $2.89 per gallon, including taxes and net of effective hedges, it forecast unit costs (CASM) to rise 8%–10% from 2010. This is management guidance, not a guarantee.
- JetBlue hedged 51% of 2010 fuel consumption. At year-end it had hedged approximately 28% of forecast 2011 fuel needs and 6% of 2012 needs. A hypothetical 10% increase in fuel cost was estimated to raise 2011 fuel expense by about $130.
- Key risks include fuel-price volatility and availability, intense fare competition, economic and travel-demand changes, heavy fixed obligations and aircraft commitments, dependence on the New York area and congestion-prone airports, weather disruption, and rising maintenance costs as the fleet ages. A 10% fuel-price increase was estimated to add about $130 to annual fuel expense based on expected 2011 consumption.
- New DOT passenger-protection rules effective April 2010 impose domestic tarmac-delay limits and potential penalties of up to $27,500 per passenger. The filing also notes possible added costs from future environmental regulation, airport constraints, and labor organizing; the workforce was non-union at year-end.
- Unusual costs included approximately $22 in one-time customer-service-system implementation expenses ($9 in salaries and benefits and $13 in other operating expenses), a roughly $6 LiveTV spectrum-license impairment, and a $5 aircraft rescheduling fee. Severe winter weather also added costs.
- JetBlue identified a material weakness in controls over expired awards in its former TrueBlue program. It corrected errors and restated the three years ended December 31, 2009 for expired-point revenue, and said controls were strengthened. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2010; the auditor issued unqualified opinions on the financial statements and controls.
- Management considered ordinary-course legal proceedings not expected to have a material adverse effect. The company paid no cash dividends and said it had no current intention to do so.
Most important facts for investors to verify
- Whether fare and load-factor gains can continue to offset fuel inflation and forecast 2011 unit-cost increases.
- Liquidity and financing capacity after the 2010 cash decline, near-term debt maturities, and substantial aircraft, lease, and other fixed commitments.
- Actual 2011 fuel prices and hedge coverage, including collateral or margin-call exposure if hedge positions move adversely.
- Progress and cost of fleet aging, maintenance needs, aircraft delivery financing, and the planned pace of capacity growth.
- Whether the TrueBlue revenue restatement and strengthened controls fully address the identified prior-period errors.