JBLU

JetBlue Airways Corporation: Q2 2007 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2007. JetBlue Airways Corporation operates as a low-cost carrier with a significant presence in the New York metropolitan area. During this period, the company underwent a leadership transition, appointing David Barger as CEO, while founder David Neeleman became non-executive Chairman. The airline continues to expand its fleet, primarily with Airbus A320 and Embraer 190 aircraft, while managing construction of a new terminal at JFK Airport.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 19% in Q2 and 21% YTD, driven by a 31% increase in departures and a 4% increase in yield (Q2). Passenger revenues rose $104 million in Q2.
• Profitability: Operating income improved significantly, rising $26 million in Q2 and $38 million YTD compared to 2006. The company returned to profitability in Q2 after a net loss in the first half of 2006.
• Cost Structure: Operating expenses increased 16% in Q2 due to fleet expansion (24 additional aircraft on average). However, cost per available seat mile (CASM) increased only 3.9% in Q2, despite a 9.4% decrease in average stage length caused by the introduction of shorter-range Embraer 190 aircraft.
• Operational Efficiency: On-time performance declined to 69.0% in Q2 2007 from 77.9% in Q2 2006, attributed to congestion at JFK Airport. The completion factor was 98.5%.
• Compensation Changes: Salaries and benefits increased due to a revised employee retirement plan, raising the company match from 3% to 5% and guaranteeing a 5% profit-sharing contribution.

Guidance, Outlook, and Risks

• Full-Year 2007 Outlook:
  • Capacity: Expected to increase 10% to 12% over 2006.
  • Unit Costs: Cost per available seat mile expected to increase 7% to 9% (assuming fuel at $2.07/gallon net of hedges).
  • Margins: Operating margin expected between 5% and 7%; pre-tax margin between 1% and 3%.
• Strategic Actions: The company plans to sell three Airbus A320 aircraft in late 2007 and has agreed in principle to defer delivery of 16 Embraer 190 aircraft to 2013-2015 to manage growth and cash flow.
• Risks and Contingencies:
  • JFK Congestion: Ongoing runway construction and increased flight activity at JFK are causing delays and cancellations, negatively impacting revenue and increasing compensation costs.
  • Fuel Prices: Fuel costs remain high, representing 34% of operating expenses in Q2. The company has hedged approximately 43% of remaining 2007 fuel requirements.
  • Weather Events: First-quarter ice storms resulted in $24 million in customer vouchers and an estimated $20 million in revenue reduction due to cancellations.

Investor Verification Checklist

• JFK Congestion Impact: Verify the duration and financial impact of delays at JFK Airport on future quarters.
• Fleet Strategy: Confirm the execution of the Embraer 190 delivery deferrals and the sale of three Airbus A320s to ensure alignment with the slowed growth strategy.
• Fuel Hedging: Monitor the effectiveness of fuel hedges given the volatility in crude oil prices and the company's exposure to unhedged volumes.
• Cost Discipline: Assess whether the increased retirement plan contributions and pilot pay rates will continue to pressure margins as the fleet ages and maintenance costs rise.
• Liquidity: Review the $48 million working capital position against the $678 million in contractual obligations due in the remainder of 2007.