JetBlue Airways Corporation — Q2 2019 Form 10-Q
Business context and period. JetBlue provides air transportation across the United States, Caribbean and Latin America. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018; balance-sheet comparisons are with December 31, 2018. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2.105B | $1.928B | $3.977B | $3.682B |
| Operating income (loss) | $250M | $(152)M | $325M | $(27)M |
| Net income (loss) | $179M | $(121)M | $221M | $(31)M |
| Diluted EPS | $0.59 | $(0.39) | $0.73 | $(0.10) |
| Operating margin | 11.9% | (7.9)% | 8.2% | (0.7)% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $968M | $722M |
- Q2 revenue and unit metrics: Revenue rose 9.2%, primarily reflecting 5.9% capacity growth and an 8.3% increase in average fare. Operating revenue per available seat mile (RASM) increased 3.1% to 13.14 cents; load factor edged down 0.2 percentage points to 86.0%.
- Costs and margins: Q2 GAAP operating expenses fell 10.8%, largely because Q2 2018 included a $319M Embraer E190 fleet impairment. Excluding special items, expenses increased 5.3%, while cost per available seat mile excluding fuel and specified items (CASM ex-fuel, a non-GAAP measure) rose 1.8% to 8.46 cents. Salaries, wages and benefits increased 18.5% in Q2, mainly due to the pilot labor agreement and more crewmembers.
- Six-month trends: Revenue grew 8.0%; average fare rose 6.0%, passengers rose 1.9%, and capacity increased 7.9%. Load factor declined 1.1 percentage points to 84.3%. Six-month CASM ex-fuel increased 1.4% to 8.56 cents.
- Adjusted results: Management reported Q2 adjusted net income of $180M and adjusted diluted EPS of $0.60, versus $119M and $0.37 in Q2 2018. For the first half, adjusted net income was $232M and adjusted diluted EPS was $0.76, versus $202M and $0.63. These non-GAAP figures exclude special items and, for the six-month comparison, the 2017 tax-reform impact.
- Cash and investment: First-half operating cash flow was $968M. Capital expenditures were $328M and aircraft predelivery deposits were $142M; management-defined free cash flow was $498M, compared with $316M in 2018. Investing activities used $568M and financing activities used $411M. Cash, cash equivalents and restricted cash ended at $522M, down $11M from year-end.
- Liquidity: At June 30, unrestricted cash and cash equivalents were $461M and short-term investments were $448M. JetBlue reported about $909M of unrestricted cash, equivalents and short-term investments, approximately 11% of trailing-twelve-month revenue, plus about $625M of undrawn credit lines. Working capital deficit was $1.4B, up from $1.1B at year-end; management said available liquidity was expected to cover requirements for at least 12 months.
- Debt and leases: Balance-sheet long-term debt and finance lease obligations were $1.217B, with $275M of current maturities, for $1.492B in total. First-half principal payments were $182M. Operating lease liabilities were $886M ($133M current and $753M long-term); finance lease liabilities were $99M. Debt and finance lease contractual payments, including estimated interest, totaled $1.723B.
- Share repurchases: JetBlue spent $256M on treasury stock in the first half, including $250M under accelerated share repurchase agreements. A $125M ASR initiated in June was expected to conclude by the end of Q3 2019; final share delivery remained undetermined.
Material changes and business developments
- JetBlue announced plans for multiple daily flights from New York JFK and Boston to London in 2021. It converted 13 A321neo orders to A321LRs and another 13 to A321XLRs, and made 10 A220-300 options firm orders. Firm orders at quarter-end totaled 84 A321neo and 70 A220 aircraft, with deliveries scheduled through 2026.
- Airbus delivery delays meant JetBlue expected to receive no more than six A321neo aircraft in 2019. The company took delivery of its first A321neo in June and expected it to enter service in the fall.
- JetBlue adopted the new lease accounting standard effective January 1, 2019. The filing describes a $58M cumulative retained-earnings adjustment at the beginning of the retrospective reporting period, principally related to the JFK Terminal 5 build-to-suit project.
- The pilot collective bargaining agreement took effect August 1, 2018 and drove higher compensation and benefit costs. Inflight crewmembers had elected TWU representation; the company was working toward a collective bargaining agreement.
Guidance, commentary and risks
- Q3 2019 outlook: CASM ex-fuel expected to increase 0.5%–2.5% year over year; RASM expected to range from a 0.5% to 3.5% increase; capacity expected to grow 3.0%–5.0%.
- Full-year 2019 outlook: CASM ex-fuel expected to increase 0.5%–1.5%; operating capacity expected to grow 5.5%–6.5%. The filing provides no full-year revenue or earnings guidance.
- Fuel sensitivity: A hypothetical 10% increase in fuel cost from June 30 levels was estimated to raise fuel expense by about $185M over the next 12 months. JetBlue had hedged approximately 5% of projected fuel needs for the remainder of 2019; hedge contracts outstanding at quarter-end settled by June 30, 2020.
- Capital commitments: Total contractual obligations were $14.521B, including $8.715B for flight equipment purchases and $2.853B for other commitments. The company said aircraft financing for deliveries after 2019 could not be assured on attractive terms; if financing were unavailable or unattractive, it might need to use cash, alter aircraft plans or accept higher financing costs.
- Operating and legal risks: Management cited fuel-price volatility, intense competition, labor costs or disruptions, aircraft supplier delays, congestion and dependence on New York and Boston, weather, economic downturns, disease outbreaks, cyber and technology risks, and geopolitical events. Runway closures in focus cities could affect 2019 operations. On-time performance was 74.8%, although completion factor improved to 99.3%. Legal and regulatory matters were described as ordinary-course matters; outcomes could nevertheless result in material losses, and the filing states actual outcomes may differ from recorded estimates.
- Unusual prior-period item: The $319M Q2 2018 E190 impairment materially distorts GAAP year-over-year expense and earnings comparisons. JetBlue also recorded $14M of special items in the first half of 2019, including $9M of fleet-transition costs and $5M of pilot-contract implementation costs.
Most important facts for investors to verify
- Whether fare and RASM growth can continue as capacity expands and load factor has declined year over year.
- Whether labor and other underlying costs remain consistent with CASM ex-fuel guidance, and how much the pilot agreement continues to affect margins.
- Whether Airbus delivery delays affect fleet growth, London launch plans, capital spending or financing needs.
- Whether projected liquidity remains adequate given the working capital deficit, aircraft commitments, share repurchases and potential fuel-price shocks.
- How to interpret GAAP results alongside management’s non-GAAP adjusted earnings and CASM ex-fuel measures, particularly given the large 2018 impairment charge.