Business Context and Reporting Period
Company: JetBlue Airways Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: JetBlue is a low-cost passenger airline operating primarily on point-to-point routes. As of year-end 2007, it served 53 destinations with a fleet of 134 aircraft (104 Airbus A320s and 30 Embraer 190s). The company focuses on high-quality customer service, low fares, and a non-union workforce. It is the largest domestic carrier at New York's JFK airport.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Operating Revenues | $2,842 million | $2,363 million |
| Operating Income | $169 million | $127 million |
| Net Income | $18 million | $(1) million |
| Operating Margin | 6.0% | 5.4% |
| Net Cash from Operating Activities | $358 million | $274 million |
| Total Debt | $3,048 million | $2,840 million |
| Cash & Investments | $834 million | $699 million |
| Cost per ASM (excl. fuel) | 5.47 cents | 5.19 cents |
| Average Fuel Price | $2.09/gallon | $1.99/gallon |
Material Changes vs. Prior Period
- Profitability Improvement: The company returned to profitability with $18 million in net income, reversing a $1 million net loss in 2006. Operating income increased by $42 million (33%) to $169 million.
- Revenue Growth: Operating revenues rose 20% ($479 million), driven by a 7.4% increase in yield (average fare) and a 24% increase in departures, despite a slight decline in load factor to 80.7%.
- Fuel Cost Pressure: Aircraft fuel expenses increased 24% to $929 million, representing 34.8% of total operating expenses. The average fuel price rose 5% year-over-year.
- Operational Challenges: The first quarter was negatively impacted by an ice storm causing ~1,200 cancellations. Summer delays at JFK due to congestion also affected on-time performance (70.1%).
- Strategic Shifts: Management adopted a more disciplined growth strategy, deferring aircraft deliveries and selling older aircraft to manage costs and fleet age.
Guidance, Outlook, and Risks
2008 Outlook
- Capacity: Expected to increase 5% to 8% over 2007.
- Costs: Cost per available seat mile (CASM) expected to increase 10% to 12% (assuming $2.55/gallon fuel net of hedges).
- Margins: Operating margin projected between 6% and 8%; pre-tax margin between 1% and 3%.
- Capital: In January 2008, JetBlue sold approximately 42 million shares to Deutsche Lufthansa AG for ~$300 million to fund working capital.
Key Risks and Contingencies
- Fuel Volatility: Fuel is the single largest operating expense. The company hedges approximately 30% of expected consumption but remains exposed to price spikes.
- Liquidity & Auction Rate Securities (ARS): As of February 2008, $330 million of investments were in ARSs. Unsuccessful auctions for $144 million of these securities have limited short-term liquidity, though the underlying collateral (student loans) is considered secure.
- Debt Obligations: Total debt of $3.05 billion accounts for 75% of total capitalization. Significant fixed obligations exist for aircraft leases and the new JFK Terminal 5 construction.
- Unionization: The company maintains a non-union workforce but faces ongoing risks of unionization which could increase labor costs.
Investor Verification Checklist
- ARS Liquidity: Verify the current status of the $330 million in Auction Rate Securities and the impact of failed auctions on cash flow availability.
- Fuel Hedging Effectiveness: Review the specific hedge positions and the sensitivity of 2008 results to fuel prices above the $2.55/gallon assumption.
- JFK Terminal 5 Progress: Confirm the timeline and cost overruns, if any, for the new Terminal 5 construction scheduled for late 2008 completion.
- Debt Covenants: Ensure compliance with collateral coverage ratios for spare parts pass-through certificates and other debt instruments.
- Labor Relations: Monitor any developments regarding unionization efforts among pilots, flight attendants, or other employee groups.