JETBLUE AIRWAYS CORP quarterly report, Q1 FY2020

JetBlue Airways Corporation — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. JetBlue provides air transportation in the U.S., Caribbean and Latin America. Results were materially affected by the COVID-19 pandemic and are not necessarily indicative of future periods.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019
Operating revenue	$1.588 billion	$1.871 billion
Operating income (loss)	$(334) million; (21.0)% margin	$76 million; 4.1% margin
Net income (loss)	$(268) million	$42 million
Diluted EPS	$(0.97)	$0.14
Operating cash flow	$124 million	$420 million
Free cash flow (non-GAAP)	$(243) million	$256 million

• Revenue fell 15.1%, primarily as passenger revenue declined 16.1%. Revenue passengers fell 19.8%, load factor declined 12.7 points to 69.8%, and operating revenue per available seat mile (RASM) decreased 12.0% to 10.67 cents.
• Operating expenses rose 7.1% to $1.922 billion, including a $202 million E190 fleet impairment. Excluding special items, operating expenses declined 3.6%; CASM excluding fuel, special items and non-airline expenses increased 4.0% to 9.01 cents.
• Excluding special items, JetBlue reported an operating loss of $132 million, net loss of $116 million and diluted loss per share of $0.42. These are non-GAAP measures; GAAP results are shown above.
• Cash, cash equivalents and investment securities totaled approximately $1.8 billion at March 31. Current liabilities exceeded current assets by $1.4 billion, up from $877 million at year-end, in part following the $1.0 billion term-loan draw and higher air traffic liabilities.
• At March 31, short-term borrowings were $983 million and long-term debt and finance lease obligations totaled about $2.2 billion, including current maturities. Scheduled debt and finance-lease obligations, including estimated interest, were disclosed as $3.6 billion. JetBlue had pledged assets with a $5.6 billion net book value under financing arrangements.
• Cash flow from operations declined to $124 million from $420 million. Capital expenditures and aircraft deposits totaled $367 million, producing negative free cash flow of $243 million.

Material changes and unusual items

• COVID-19 drove a sharp demand decline beginning in late February and accelerating through March. Passenger revenue fell $291 million year over year. Fuel expense decreased 16.4% to $365 million, reflecting lower fuel prices and consumption; salaries, wages and benefits increased 4.5% to $601 million.
• JetBlue recorded a $202 million impairment charge for its Embraer E190 fleet and related assets after projected cash flows fell below carrying value. It found no impairment for its A320 or A321 fleets at March 31, but said future assessments could change.
• Financing activities included a $983 million draw on a 364-day term loan facility. The loan matures March 15, 2021 and is secured by certain aircraft and spare engines. JetBlue also repurchased shares for $160 million under an accelerated repurchase agreement before suspending repurchases.
• On-time performance improved to 84.8% from 73.7%; completion factor declined to 93.7% from 97.8%.

Outlook, actions and risks

• Management expected adverse pandemic effects to worsen in Q2 and planned for a modest Q3 demand recovery, while emphasizing that timing and pace were highly uncertain. JetBlue expected Q2 capacity to be approximately 80% below Q2 2019 and temporarily parked about 170 aircraft, roughly 65% of its fleet. It provided no clear detailed full-year financial guidance.
• Management reported reducing daily cash burn from an average of $18 million in the second half of March to about $10 million by May, and intended to continue cost and cash-conservation measures. Actions included a hiring freeze, voluntary time-off programs, 20%–50% officer salary reductions, renegotiated supplier terms, and suspension of non-critical capital spending.
• By April 30, cash and restricted cash totaled $3.1 billion, following additional actions after quarter-end. These included borrowing $550 million under the revolving credit facility and receiving $936 million under the CARES Act Payroll Support Program: $685 million in grants and a $251 million unsecured loan. The support funds were restricted for crew wages and benefits through September 30, 2020.
• The CARES Act support carries conditions, including limits on furloughs and pay reductions through September 30, 2020, service requirements through March 1, 2022, restrictions on dividends and buybacks, and executive compensation limits. Treasury received warrants for approximately 2.6 million shares at $9.50 per share. JetBlue had also applied for a separate Treasury loan of up to approximately $1.1 billion; it was not reported as received in this filing.
• JetBlue amended its Airbus purchase agreement in May, reducing aircraft capital expenditures through 2022 by $1.1 billion and changing delivery timing. Aircraft commitments were substantial; the filing also notes a 15% U.S. tariff on certain aircraft and parts from the EU that could increase costs.
• Key uncertainties include the duration and severity of the pandemic, demand recovery, liquidity and access to financing, substantial fixed obligations and aircraft commitments, possible customer refunds and credit-card processor collateral demands, fuel and interest-rate volatility, and potential further asset impairments. A 10% fuel-price increase was estimated to raise fuel expense by about $128 million over the next 12 months.

Important facts for investors to verify

• Whether demand and capacity recover as management anticipated, and whether daily cash burn continues to decline.
• Current unrestricted liquidity, borrowing availability, covenant compliance and the effect of additional debt or CARES Act financing.
• Compliance with government-aid conditions, including service, workforce, compensation and capital-return restrictions, and potential warrant dilution.
• Whether the E190 impairment assumptions remain appropriate and whether further fleet or intangible-asset impairments are required.
• The revised Airbus delivery and payment schedule, remaining capital commitments, tariff exposure and financing terms for future aircraft.
• Potential cash effects from refunds, air traffic liabilities and any collateral requirements imposed by credit-card processors or other counterparties.