JBLU

JetBlue Airways Corporation: Q1 2008 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. JetBlue Airways Corporation operates as a low-cost carrier in the U.S. domestic and international markets. The quarter was characterized by record-high fuel prices, a slowing U.S. economy, and significant liquidity events, including a strategic equity investment by Deutsche Lufthansa AG.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 34% ($208 million) driven by a 33% increase in passenger revenue. This was fueled by a 20% increase in yield (average fare rose 22% to $135.64) and a 14% capacity increase.
• Profitability Improvement: The company moved from an operating loss of $13 million in Q1 2007 to an operating income of $17 million in Q1 2008. Net loss narrowed significantly from $22 million to $8 million.
• Fuel Cost Impact: Aircraft fuel expense surged 62% ($118 million increase) due to a 41% rise in average fuel cost per gallon. Despite this, non-fuel costs per available seat mile remained flat compared to the prior year.
• Liquidity Transformation: Cash and cash equivalents grew from $190 million at year-end 2007 to $713 million at March 31, 2008. This was primarily due to a $301 million equity offering to Deutsche Lufthansa AG and net proceeds from investment securities sales.
• Working Capital: A working capital deficit of $203 million existed at period end, largely due to the classification of $175 million in convertible notes as current liabilities and the reclassification of illiquid Auction Rate Securities (ARS) to long-term assets.

Guidance, Outlook, and Risks

• Full-Year 2008 Guidance:
  • Operating Margin: Expected between 2% and 4%.
  • Pre-Tax Margin: Expected between (2%) and 0%.
  • Capacity: Full-year operating capacity expected to increase 3% to 5% over 2007.
  • Costs: Cost per available seat mile (CASM) expected to increase 20% to 22% over 2007, assuming fuel prices of $3.05 per gallon net of hedges.
• Strategic Actions: JetBlue plans to sell nine Airbus A320 aircraft in 2008 to manage capacity and liquidity. Service to Tucson, Arizona, will be discontinued in May 2008 due to slow market maturation and high fuel costs.
• Risks and Contingencies:
  • Auction Rate Securities (ARS): $313 million of ARS are classified as non-current due to market illiquidity. An unrealized loss of $11 million was recorded in other comprehensive income. If the impairment is deemed "other than temporary," a significant charge to the income statement could occur.
  • Fuel Volatility: A hypothetical 10% increase in fuel prices would increase annual fuel expense by approximately $148 million.
  • Credit Card Reserves: Potential requirement to post reserves with credit card processors could significantly impact liquidity.

Investor Verification Checklist

• Verify the status of the $313 million in Auction Rate Securities and whether the $11 million impairment will be reclassified to the income statement in future quarters.
• Monitor the execution of the planned sale of nine Airbus A320 aircraft to ensure liquidity targets are met.
• Track fuel hedging effectiveness as the company has hedged only ~32% of remaining 2008 requirements, leaving significant exposure to price spikes.
• Confirm the impact of the Deutsche Lufthansa AG investment on future strategic operations and board composition.
• Review the working capital deficit drivers, specifically the $175 million convertible note repurchase right due July 15, 2008.