JetBlue Airways Corporation — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. JetBlue provides air transportation across the United States, the Caribbean and Latin America. Management cautions that seasonality and other factors mean quarterly results may not indicate full-year performance.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior balance |
|---|---|---|
| Operating revenue | $1.871 billion | $1.754 billion; up 6.7% |
| Operating income / margin | $76 million / 4.1% | $125 million / 7.1% |
| Net income | $42 million | $90 million |
| Diluted EPS | $0.14 | $0.28 |
| Adjusted net income and diluted EPS (non-GAAP) | $51 million / $0.16 | $83 million / $0.26 |
| Operating cash flow / free cash flow (non-GAAP) | $420 million / $256 million | $490 million / $287 million |
| Cash and cash equivalents; short-term investments | $464 million; $412 million | $474 million; $413 million at Dec. 31, 2018 |
| Long-term debt and finance lease obligations, balance-sheet current and long-term amounts combined | $1.539 billion | $1.670 billion at Dec. 31, 2018 |
| Operating lease liabilities | $908 million | $931 million at Dec. 31, 2018 |
| Working capital | Deficit of $1.3 billion | Deficit of $1.1 billion at Dec. 31, 2018 |
Revenue growth reflected 10.1% higher capacity, 2.9% more revenue passengers and a 3.5% increase in average fare. Load factor fell 2.1 percentage points to 82.5%; operating revenue per available seat mile declined 3.1% to 12.12 cents. Operating expense per available seat mile was nearly flat, up 0.1% to 11.63 cents; excluding fuel and special items, it increased 0.9% to 8.66 cents. The fuel price per gallon declined 2.0% to $2.05, while fuel consumption rose 7.0%.
Cash, cash equivalents and restricted cash totaled $521 million at quarter-end. Management reported $876 million of unrestricted cash, cash equivalents and short-term investments, approximately $625 million of undrawn credit lines, and 113 unencumbered aircraft plus 50 unencumbered spare engines. JetBlue generated $420 million in operating cash flow; cash used for investing and financing was $169 million and $263 million, respectively. Financing included $133 million of debt and finance lease repayments and a $125 million accelerated share repurchase (ASR) payment.
Material changes versus Q1 2018
- Operating revenue increased $117 million, but operating income fell $49 million and net income fell $48 million. Operating margin contracted 3.0 percentage points.
- Salaries, wages and benefits increased $76 million, or 15.2%, primarily reflecting the pilots’ collective bargaining agreement effective August 2018 and more crew members. Management also cited the timing of Easter and Passover as a factor affecting the quarter’s margin.
- Operating cash flow declined $70 million. Capital expenditures were lower, but free cash flow also declined by $31 million.
- JetBlue adopted lease accounting standard ASC 842 on January 1, 2019; the filing reports operating lease assets of $1.028 billion and operating lease liabilities of $908 million at March 31, 2019. Comparative results were recast as described in the filing.
Guidance, commentary, risks and unusual items
- Guidance: For Q2 2019, management expected revenue per available seat mile growth of 1.0%–4.0%, capacity growth of 4.5%–6.5%, and cost per available seat mile excluding fuel growth of 1.5%–3.5%, versus Q2 2018. For full-year 2019, it expected capacity growth of 4.5%–6.5% and cost per available seat mile excluding fuel growth of 0.0%–2.0%. These are forward-looking estimates, not guarantees.
- Special items: $12 million of Q1 expense comprised $9 million of Embraer E190 fleet-transition costs and $3 million of pilot-contract implementation costs. Management said special items reduced reported diluted EPS by $0.02. Additional E190 transition expenses may arise.
- Network and fleet: JetBlue announced plans for multiple daily flights from JFK and Boston Logan to London in 2021 and converted 13 A321neo deliveries to the long-range configuration. Airbus delivery delays meant at least six A321neo deliveries were expected in 2019. The company had firm orders for 85 A321neo and 60 A220 aircraft, with substantial future purchase commitments.
- Liquidity and financing: Management believed liquidity was adequate and sufficient for requirements over at least the next 12 months. It disclosed a $1.3 billion working capital deficit, which it attributed in part to air traffic liabilities typical of the airline business. Aircraft financing on attractive terms is not assured; inability to obtain it could require cash payment, changes to acquisition plans or higher financing costs.
- Key risks: Fuel-price volatility, competition, economic or demand shocks, weather and infrastructure disruptions, congestion in the New York and Boston markets, labor costs and potential labor disruption, supplier dependence, and financing availability. A hypothetical 10% rise in fuel cost was estimated to increase fuel expense by about $190 million over the next 12 months. Only about 2% of projected remaining-2019 fuel requirements was hedged at March 31; existing hedge contracts settled by June 30.
- Labor and contingencies: JetBlue was negotiating a collective bargaining agreement with inflight crew members represented by TWU. The company disclosed ordinary-course legal matters and said outcomes could differ materially from estimates; it had recorded accruals where appropriate. Management reported compliance with debt and lease covenants.
Most important facts for investors to verify
- Whether passenger revenue and unit revenue improve enough to offset capacity growth and weaker load factor.
- Whether labor, maintenance and other operating-cost increases remain within the full-year cost guidance.
- Actual fuel prices, consumption and hedge coverage, given the disclosed sensitivity to fuel-cost increases.
- Aircraft delivery timing, purchase commitments and the availability and cost of financing for planned fleet growth.
- Liquidity, working-capital needs and the final share count and settlement of the Q2 2019 ASR.
- Progress in the inflight crew labor negotiations and any material developments in legal contingencies.