JetBlue Airways Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. JetBlue provides air transportation across the United States, the Caribbean, and Latin America.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1.687 billion | $1.529 billion | $4.822 billion | $4.371 billion |
| Operating income | $351 million | $164 million | $886 million | $346 million |
| Operating margin | 20.8% | 10.7% | 18.4% | 7.9% |
| Net income | $198 million | $79 million | $487 million | $313 million |
| Diluted EPS | $0.58 | $0.24 | $1.42 | $0.93 |
- Revenue and operations: Q3 passenger revenue rose 9.7% to $1.551 billion, reflecting 7.7% more revenue passengers and a 1.9% higher average fare. Capacity (ASMs) increased 10.4%; load factor declined 0.9 percentage points to 85.3%. Nine-month passenger revenue rose 10.9%.
- Costs and margins: Q3 operating expense fell 2.0% to $1.336 billion as fuel expense declined 33.6%, partly offset by higher labor, maintenance, and other costs. Fuel cost averaged $1.85 per gallon, down 39.5%. CASM excluding fuel and profit sharing, a non-GAAP measure, increased 2.4% for Q3 and 0.4% for the nine-month period.
- Cash flow: Nine-month operating cash flow was $1.294 billion, versus $724 million in 2014. Investing cash outflow was $763 million, including $493 million of capital expenditures; financing cash outflow was $328 million. Cash and cash equivalents ended the period at $544 million, up from $341 million at year-end 2014.
- Liquidity: Cash, cash equivalents, and short-term investments totaled about $1.132 billion; management also reported approximately $600 million of undrawn credit lines. Working capital was negative $599 million, compared with negative $736 million at December 31, 2014. Management expected available resources to cover requirements for at least 12 months.
- Debt and capital: Balance-sheet current maturities of debt and capital leases were $238 million, with $1.744 billion of long-term debt and capital lease obligations. Weighted-average interest rate was 4.6%; scheduled debt maturities peak at $455 million in 2016. JetBlue repurchased $164 million of treasury shares during the nine months, including a $150 million accelerated share repurchase.
Changes versus the prior comparable period
- Q3 operating income increased $187 million, principally from lower fuel costs and higher passenger revenue. Revenue growth was accompanied by 10.4% capacity growth and a lower quarterly load factor.
- Nine-month operating income increased to $886 million from $346 million. The 2014 comparison included a $241 million pretax gain on the LiveTV sale; excluding that gain, 2014 net income was $145 million and diluted EPS was $0.44, versus $487 million and $1.42 in 2015.
- Nine-month fuel expense fell $428 million, but labor expense rose $176 million and maintenance expense rose $66 million. The company attributed higher labor costs primarily to profit sharing and additional headcount.
- Nine-month operating cash flow increased by $570 million, mainly reflecting higher earnings and lower fuel costs. The prior-year period included $393 million in proceeds from the LiveTV sale.
Outlook, commentary, risks, and unusual items
- 2015 guidance: Full-year capacity growth forecast at 8.5%–9.5%; CASM excluding fuel and profit sharing forecast to increase 0%–1.0% year over year. For Q4, the corresponding cost measure was expected to increase 0%–2.0%, with capacity growth of 8.5%–10.5%. Capacity guidance was raised from the prior quarter, which management attributed to additional Mint service and a strong completion factor.
- Commercial initiatives: Fare Options launched June 30, 2015; management said Q3 incremental operating income from fare upsells and first checked bags exceeded its initial target. A new Barclaycard co-branded credit card partnership was expected to launch in Q1 2016.
- Fuel exposure: Approximately 15% of remaining projected 2015 fuel requirements were hedged as of September 30; all then-outstanding hedge contracts settled by year-end. A hypothetical 10% fuel-price increase was estimated to add about $130 million to fuel expense over the next 12 months. Nine-month realized fuel-hedge settlement losses were $93 million, compared with $4 million in 2014.
- Investment and obligations: Firm aircraft orders totaled 119 aircraft and 10 spare engines, with approximately $6.485 billion of flight-equipment purchase obligations. Total disclosed contractual obligations were $14.440 billion. Management cautioned that financing for deliveries after 2015 might not be available on attractive terms, and that fixed costs would rise regardless of financing method.
- Other risks and contingencies: Risks cited include fuel-price volatility, competition, labor costs and union negotiations, significant fixed obligations, Northeast congestion and weather, financing availability, technology and cybersecurity, regulation, and economic or geopolitical disruptions. A DOT inquiry into airline pricing during Amtrak service disruption was ongoing; JetBlue said it did not expect a material financial impact. JFK environmental remediation was estimated at $1–$3 million, with $1 million accrued; insurance was expected to mitigate some exposure. The company reported ordinary-course legal matters and an appealed pilot arbitration award of approximately $4.4 million.
- Subsequent events: In October 2015, JetBlue agreed to buy out six aircraft leases for approximately $110 million and exercised its right to redeem the remaining $42 million principal of Series B convertible debentures, subject to any further holder conversions.
Most important facts for investors to verify
- Whether passenger demand, fares, load factor, and capacity growth support the revenue outlook as capacity expands.
- Whether fuel prices and hedge settlements materially change costs; note that the reported CASM guidance excludes fuel and profit sharing.
- Whether labor, maintenance, and other unit costs remain within guidance as headcount and fleet size grow.
- How JetBlue funds its aircraft commitments and manages 2016 debt maturities, lease buyouts, and liquidity while continuing share repurchases.
- The effects of the new credit-card partnership and applicable loyalty-program accounting changes, which the company was still evaluating.
- Developments in the DOT inquiry, environmental remediation, and pilot litigation, including any outcome materially different from current estimates.