JetBlue Airways Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. JetBlue provides air transportation across the U.S., Caribbean and Latin America. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,643 | $1,612 | $3,260 | $3,135 |
| Operating income | $313 | $282 | $662 | $535 |
| Operating margin | 19.1% | 17.5% | 20.3% | 17.1% |
| Net income | $180 | $152 | $380 | $289 |
| Diluted EPS | $0.53 | $0.44 | $1.11 | $0.84 |
- Q2 revenue mix: Passenger revenue was $1,487 million, down 0.6%; other revenue was $156 million, up 35.2%. Total revenue rose 2.0%.
- Q2 operating performance: Capacity (ASMs) increased 11.1%, but yield fell 9.9%, average fare fell 8.8%, and load factor declined 0.6 percentage points to 85.0%. Revenue per ASM fell 8.2%.
- Cost and fuel: Q2 operating expense was flat at $1,330 million; expense per ASM fell 9.9% to 9.78 cents, mainly reflecting lower fuel costs and increased capacity. Average fuel cost fell 32.8% to $1.43 per gallon. Excluding fuel, profit sharing and related taxes, CASM fell 1.0%.
- Six-month results: Revenue increased 4.0%; capacity grew 12.6%, while average fare fell 7.8%, yield fell 8.9%, and load factor decreased 0.3 points to 84.6%. Operating expenses were nearly unchanged at $2,598 million as fuel expense declined $217 million, offset by higher labor, maintenance and other costs.
- Cash flow: Six-month operating cash flow was $1,007 million, versus $890 million. Investing cash use was $319 million and financing cash use was $71 million. Cash and cash equivalents rose to $935 million from $318 million at year-end 2015.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled approximately $1.51 billion; undrawn credit lines were approximately $600 million. Working capital deficit was $535 million, down from $902 million at year-end. Current maturities of debt and capital leases were $446 million; long-term debt and capital lease obligations were $1.30 billion. JetBlue reported 67 unencumbered aircraft and 32 unencumbered spare engines, and said it expected liquidity to cover requirements for at least 12 months.
Material changes and management commentary
- Q2 operating income increased $31 million year over year, as lower fuel costs and higher revenue more than offset increases in most other expense categories. Lower fares and yields partly offset passenger growth and capacity expansion.
- Other revenue growth reflected a full quarter of Fare Options bag fees and initial performance under the new Barclaycard co-branded credit-card partnership.
- Management attributed higher salaries and benefits to increased profit sharing and headcount; average full-time equivalent employees rose 7.6% in the first half. Maintenance costs also increased with flight hours and heavy airframe maintenance.
- Systemwide on-time performance declined to 78.9% from 82.2% in Q2 2015; management cited the concentration of operations in congested northeastern U.S. airspace. Completion factor was 99.4%, versus 99.3%.
Outlook, commitments and risks
- 2016 guidance: Third-quarter capacity growth of 5.5%–7.5% year over year and CASM excluding fuel and profit sharing growth of 1%–3%. Full-year capacity growth expected at 8.0%–9.5%, with full-year CASM excluding fuel and profit sharing expected to rise 0%–1.5%.
- Fleet plans: In July 2016, JetBlue added orders for 15 A321ceo and 15 A321neo aircraft, with deliveries scheduled from 2017 through 2023 and an option to convert A321neo orders to A321LR beginning in the second half of 2019. The 2016 list prices before customary discounts were approximately $3.6 billion. JetBlue also finalized leases for two additional A321 aircraft.
- Capital commitments: Contractual obligations totaled $13.57 billion, including $6.72 billion of flight-equipment purchase obligations, $2.04 billion of debt and capital-lease obligations, and $1.24 billion of lease commitments. Aircraft purchase commitments are substantial; financing for deliveries after 2016 was not assured on attractive terms.
- Fuel and interest exposure: A hypothetical 10% increase in fuel prices was estimated to raise fuel expense by about $122 million over the next 12 months. JetBlue had hedged approximately 13% of projected 2016 fuel needs and 10% of 2017 needs. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $4 million.
- Other risks and contingencies: The filing cites competition, fuel-price volatility, financing access, labor costs, weather, congestion, technology and cybersecurity, regulation, economic conditions, and geopolitical or public-health events. Ordinary-course legal matters could result in material losses, although no such matter had materially affected operations or financial condition to date. The company reported compliance with debt and lease covenants and no material change in previously disclosed risk factors.
- Management cautioned that quarterly results may fluctuate and that revenue growth may not continue. It expects costs to rise as the fleet and network expand and the fleet ages. The expected Cuba routes were subject to government approval.
Important facts for investors to verify
- Whether capacity growth can be matched by stable fares, yields and load factors as capacity expands.
- Whether fuel prices, hedging outcomes and labor, maintenance and other unit costs evolve in line with guidance.
- How aircraft orders and related financing affect liquidity, debt, fixed costs and returns on invested capital.
- Whether cash, investments and available credit remain adequate given working capital needs and contractual commitments.
- The effects of the new loyalty-card arrangement and the anticipated accounting changes for revenue recognition and leases.
- Progress on operational reliability, Cuba route approvals and other stated expansion plans.