JetBlue Airways Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Unaudited results.
Business context and reporting period
JetBlue provides air transportation across the United States, the Caribbean and Latin America. The company reported higher traffic and revenue, but fuel inflation and a $319 million E190 fleet impairment drove a GAAP operating loss for both the quarter and first half.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,928 | $1,836 | $3,682 | $3,437 |
| Operating income (loss) | $(144) | $347 | $(16) | $490 |
| Net income (loss) | $(120) | $207 | $(32) | $289 |
| Diluted EPS | $(0.38) | $0.62 | $(0.10) | $0.86 |
| Operating margin | (7.5)% | 18.9% | (0.4)% | 14.2% |
- Excluding the E190 impairment, management reported Q2 adjusted operating income of $175 million, adjusted net income of $120 million and adjusted diluted EPS of $0.38. For the first half, corresponding adjusted figures were $303 million, $208 million and $0.65. These are non-GAAP measures.
- Q2 passenger revenue rose 5.2% to $1,858 million; other revenue was $70 million. First-half passenger revenue increased 6.8% to $3,549 million, while other revenue rose 15.6% to $133 million.
- Q2 operating margin excluding the impairment was 9.1%, versus 18.9% a year earlier. First-half adjusted operating margin was 8.2%, versus 14.2% GAAP in 2017.
- Fuel and related taxes increased 51.1% in Q2 and 40.2% in the first half. Average fuel cost including taxes rose 41.7% to $2.28 per gallon in Q2 and 32.8% to $2.19 in the first half.
- Operating expense per available seat mile (CASM) increased 30.9% in Q2 and 19.7% in the first half, including the impairment. CASM excluding fuel, special items and specified non-airline expenses increased 1.9% in Q2 and 2.5% in the first half.
- Q2 available seat miles grew 6.3%; load factor rose 1.0 percentage point to 86.2%. Average fare declined 0.7% to $170.08. First-half capacity grew 4.8%, load factor rose 0.8 point to 85.4%, and average fare increased 2.8% to $170.61.
- First-half operating cash flow was $730 million, compared with $872 million in 2017. Investing cash outflow was $341 million and financing cash outflow was $86 million. Management reported $324 million of free cash flow for the first half.
- At June 30, cash and cash equivalents were $603 million, short-term investments were $312 million, and restricted cash was $59 million. Management reported $915 million of unrestricted cash, cash equivalents and short-term investments, plus approximately $625 million of undrawn credit lines.
- Current and long-term debt and capital lease obligations totaled approximately $1.36 billion; the filing’s debt table reports $1.243 billion of debt, excluding $115 million of capital leases. Working capital deficit was $1.0 billion. Stockholders’ equity was $4.481 billion.
Material changes versus prior comparable period
- Revenue increased 5.0% in Q2 and 7.1% in the first half, primarily reflecting passenger growth and higher capacity. Q2 revenue per ASM declined 1.2%; first-half revenue per ASM increased 2.2%.
- GAAP earnings deteriorated substantially, principally due to the $319 million noncash E190 impairment and higher fuel costs. Excluding the impairment, Q2 operating income was still below the prior-year $347 million.
- JetBlue issued $280 million of equipment notes during the first half and repaid $124 million of debt and capital lease obligations. It spent $257 million on treasury stock acquisitions, including $250 million related to accelerated share repurchases.
- Adoption of ASC 606 changed loyalty-program accounting and revenue presentation. The company retrospectively reclassified certain ancillary fees from other revenue to passenger revenue; adoption reduced previously reported 2017 net income by approximately $4 million for Q2 and $7 million for the first half.
Guidance, commentary, risks and unusual items
- Outlook: Q3 2018 CASM excluding fuel was expected to increase 1%–3%; revenue per ASM was expected to range from 0% to 3%, with capacity up 7.5%–9.5%. Full-year capacity growth was expected at 6.5%–7.5%, and full-year CASM excluding fuel was expected to range from a 1% decrease to a 1% increase. For the second half, management expected CASM excluding fuel to decline 1.5%–3.5%. Management noted that 2017 comparisons included hurricane-related costs and a $1,000 tax-reform bonus for each eligible crewmember.
- Fleet transition: JetBlue announced a binding MOU for 60 Airbus A220-300 aircraft, with options for 60 more, subject to a final purchase agreement. Deliveries of the firm aircraft were expected in 2020–2025. The 2018 list price for the firm order was approximately $5.5 billion before customary discounts. JetBlue planned to phase out its 60 E190 aircraft by approximately 2025 and expected one-time cash transition costs of $90–$110 million during 2018. The E190 decision triggered the $319 million impairment.
- Capital commitments: Aircraft and related equipment commitments were approximately $7.27 billion as of June 30, before the A220 MOU. The company said future aircraft financing availability and terms were not assured; without attractive financing it might need to use cash, modify acquisition plans or incur higher financing costs.
- Fuel and operating risks: A hypothetical 10% increase in fuel prices was estimated to add approximately $199 million to fuel expense over the next 12 months. JetBlue had hedged approximately 4% of projected 2018 fuel requirements. Management cited fuel-price volatility, competition, congestion—particularly in the New York and Boston markets—weather, infrastructure constraints, labor costs, financing access and economic conditions as risks.
- Labor and contingencies: A tentative four-year pilot agreement was subject to ratification and included a one-time $50 million ratification incentive; the effect would be recorded upon ratification. Inflight crewmembers had elected TWU representation. The company described ordinary-course legal matters and cautioned that outcomes could differ from its estimates, although none had materially affected operations or financial condition to date.
- Liquidity and controls: JetBlue said it believed available liquidity would meet cash requirements for at least the next 12 months and reported compliance with debt and lease covenants. Disclosure controls were deemed effective; ASC 606 implementation materially changed loyalty-program and air-traffic-liability accounting processes, with related control effectiveness to be assessed in the annual review.
Important facts for investors to verify
- How the E190 exit and A220 purchase agreement affect the stated transition costs, aircraft commitments, financing needs and expected operating savings.
- Whether fuel prices, hedge coverage and capacity growth develop in line with the company’s outlook, and how these affect margins and cash generation.
- Whether the pilot agreement was ratified and how labor terms, including the stated incentive, affect costs.
- Whether the $915 million of unrestricted cash and short-term investments, undrawn credit facilities and unencumbered assets remain sufficient alongside aircraft spending, repurchases and the working capital deficit.
- How reported GAAP performance compares with management’s non-GAAP results, particularly the effect of the impairment and recurring cost inflation.