Business Context and Reporting Period
Company: JetBlue Airways Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: JetBlue operates as a "value airline" focusing on service, style, and cost. As of year-end 2008, the company operated a fleet of 142 aircraft (107 Airbus A320s and 35 Embraer 190s), serving 52 destinations across the U.S., Puerto Rico, Mexico, and the Caribbean. The company is the largest carrier at New York's JFK airport and operates primarily on point-to-point routes.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Operating Revenues | $3,388 million | $2,842 million |
| Operating Expenses | $3,279 million | $2,673 million |
| Operating Income | $109 million | $169 million |
| Net Income (Loss) | $(76) million | $18 million |
| Operating Margin | 3.2% | 6.0% |
| Net Cash from Operating Activities | $(17) million | $358 million |
| Total Debt | $3,155 million | $3,048 million |
| Cash and Cash Equivalents | $561 million | $190 million |
| Cost per ASM (excl. fuel) | 5.94 cents | 5.47 cents |
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $76 million in 2008, a reversal from the $18 million net income in 2007. Operating income decreased by $60 million year-over-year.
- Fuel Cost Surge: Aircraft fuel expense increased 46% to $1.352 billion, driven by a 43% increase in the average fuel price per gallon (from $2.09 to $2.98). Fuel costs represented 41.2% of total operating expenses in 2008, up from 34.8% in 2007.
- Investment Impairment: A significant non-cash impairment charge of $53 million was recorded in the fourth quarter related to the write-down of Auction Rate Securities (ARS) due to market illiquidity.
- Revenue Growth: Operating revenues increased 19% to $3.388 billion, primarily driven by a 14% increase in yield (average fare) and a 5% increase in departures, despite a slight decline in load factor to 80.4%.
- Liquidity Position: Cash and cash equivalents increased significantly to $561 million, bolstered by a $300 million equity investment from Deutsche Lufthansa AG and various debt issuances, offsetting the negative operating cash flow.
Guidance, Outlook, and Risks
Management Outlook for 2009
- Capacity: Expected to decrease by 2% to 0% compared to 2008.
- Costs: Cost per available seat mile (excluding fuel) is expected to decrease by 5% to 7%, assuming fuel prices of $1.99 per gallon.
- Profitability Targets: Management projects a full-year operating margin between 12% and 14% and a pre-tax margin between 6% and 8%.
Key Risks and Contingencies
- Fuel Price Volatility: The company remains highly sensitive to fuel prices. While they hedged approximately 8% of 2009 requirements, they suspended their hedging program in Q4 2008 due to falling oil prices.
- Auction Rate Securities (ARS): A substantial portion of the investment portfolio ($244 million carrying value) is tied up in ARS with failed auctions. The company recorded a $67 million total impairment (with $53 million recognized in earnings) and faces liquidity constraints as these securities cannot be easily liquidated.
- Internal Control Weakness: The independent auditor issued an adverse opinion on internal controls over financial reporting. A material weakness was identified regarding inventory management, specifically the failure to timely monitor physical inventory observations and a programming error in the new inventory system implemented in Q3 2008.
- Regulatory and Operational Constraints: The company faces ongoing congestion at JFK and is involved in litigation challenging the DOT's Congestion Management Rule, which could result in the loss of operating slots at JFK.
- Debt Obligations: Total debt stands at $3.15 billion (71% of total capitalization). The company has significant fixed obligations, including $4.97 billion in firm aircraft orders through 2016.
Investor Verification Checklist
- Inventory Controls: Verify the remediation of the material weakness in inventory controls and the accuracy of current inventory balances given the adverse audit opinion.
- ARS Liquidity: Monitor the status of the $244 million in Auction Rate Securities and the potential for further impairment charges or liquidity strain.
- Fuel Hedging Strategy: Assess the effectiveness of the revised fuel hedging program in 2009 given the volatility in crude oil prices.
- Debt Covenants: Confirm compliance with debt covenants, specifically the requirement to maintain $300 million in cash and cash equivalents.
- JFK Slot Litigation: Track the outcome of the litigation regarding the DOT's slot auction rule, as a loss could materially impact capacity at the company's primary hub.