JETBLUE AIRWAYS CORP quarterly report, Q3 FY2014

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JetBlue Airways Corporation — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are year over year unless stated otherwise.

Business context and operating performance

JetBlue primarily provides air transportation across the United States, the Caribbean and Latin America. During 2014, the company sold LiveTV, which ceased to be consolidated. JetBlue continues to buy inflight entertainment and connectivity services from LiveTV under agreements with seven-year terms.

  • Q3: Revenue rose 5.9% to $1.529 billion; operating income was $164 million and net income was $79 million. Operating margin was 10.7%, versus 10.5%; diluted EPS was $0.24, versus $0.21.
  • First nine months: Revenue increased 7.2% to $4.371 billion; operating income was $346 million and net income was $313 million. Operating margin was 7.9%, versus 7.7%; diluted EPS was $0.93, versus $0.38. Nine-month net income includes the after-tax LiveTV sale gain of approximately $168 million, or $0.49 per diluted share.
  • Passenger performance: Q3 passenger revenue increased 7.0% to $1.414 billion, supported by 6.4% more passengers, 4.5% capacity growth, a 1.2-point increase in load factor to 86.2%, and a 0.9% increase in yield. For nine months, passenger revenue grew 7.7%; load factor was 84.7%, up 0.1 point.

Financial position, cash flow and costs

  • Cash and liquidity: At September 30, unrestricted cash and cash equivalents were $449 million and short-term investments were $293 million, totaling $742 million. The company also reported $550 million of undrawn credit lines. Cash and cash equivalents increased from $225 million at December 31, 2013.
  • Cash flow, first nine months: Operating activities provided $724 million, versus $565 million. Investing activities used $113 million, including $498 million of capital expenditures and $393 million of LiveTV sale proceeds. Financing activities used $387 million. Ending cash and cash equivalents were $449 million.
  • Debt and liquidity obligations: Balance-sheet current maturities of debt and capital leases were $274 million and long-term debt and capital lease obligations were $2.088 billion. Working capital was negative $700 million, compared with negative $818 million at year-end. Management said available resources were sufficient for at least the next 12 months. The company reported compliance with debt and lease covenants.
  • Operating costs: Q3 operating expenses rose 5.7% to $1.365 billion; expense per available seat mile (ASM) increased 1.2% to 11.61 cents. Nine-month expenses rose 7.0% to $4.025 billion; expense per ASM increased 2.4% to 11.99 cents. Excluding fuel and profit sharing, expense per ASM rose 2.6% in Q3 and 4.6% for nine months.
  • Key cost drivers: Nine-month salaries, wages and benefits increased 14.4%, reflecting wage rates, staffing growth, FAA duty/rest rules and winter-related costs. Fuel expense increased 3.0%, while average fuel cost per gallon declined 2.1% to $3.09. Maintenance expense fell 8.8%.

Material changes and unusual items

  • JetBlue sold LiveTV for net cash proceeds of $393 million and recorded a pretax gain of approximately $241 million. The reported after-tax gain was approximately $168 million. Proceeds were allocated to debt reduction and share repurchases.
  • Debt repayments included a $299 million prepayment of floating-rate debt secured by 14 A320 aircraft; those aircraft became unencumbered. At quarter-end, JetBlue reported 35 unencumbered aircraft and 35 unencumbered spare engines.
  • Q1 severe winter weather led to approximately 4,100 flight cancellations and reduced revenue while increasing de-icing and disruption-related costs. Q3 on-time performance improved to 76.4% from 72.6%, while the completion factor declined to 98.7% from 99.5%.
  • The company repurchased shares, including an accelerated share repurchase totaling approximately 5.5 million shares for $60 million. Nine-month treasury-stock purchases were $82 million.

Outlook, commitments and risks

  • 2014 outlook: Management expected full-year operating capacity to increase approximately 4%–6% versus 2013. CASM excluding fuel and profit sharing was expected to increase 2.5%–4.5%, driven mainly by wages, depreciation and airport landing fees. The filing does not provide a clear full-year earnings or revenue forecast.
  • Aircraft investment: Firm aircraft and related flight-equipment commitments totaled approximately $6.575 billion, including $200 million for the remainder of 2014, $660 million in 2015 and $785 million in 2016. Total contractual obligations were $15.365 billion. JetBlue cautioned that future aircraft financing may not be available on attractive terms.
  • Fuel exposure: A hypothetical 10% increase in fuel prices was estimated to raise fuel expense by approximately $207 million over the next 12 months, after considering hedges. Approximately 27% of projected 2014 fuel requirements were hedged at September 30; hedge contracts could also require collateral funding.
  • Operating and financial risks: Management cited competition, fuel-price volatility, substantial fixed obligations and indebtedness, financing availability, labor costs and relations, reliance on the congested New York market, weather disruptions, economic conditions, regulation and operational technology risks. The company cautioned that quarterly results may fluctuate and are not necessarily indicative of future performance.
  • Contingencies: JetBlue accrued $2 million for JFK subsurface contamination remediation, with preliminary estimated costs of $1–$3 million; insurance is expected to mitigate some exposure. A pilot employment dispute resulted in an approximately $4.4 million arbitration award to 318 claimants; claimants sought to vacate the award. A WestJet claim against LiveTV sought $15 million plus unspecified damages; loss likelihood was not assessable, and JetBlue retained certain indemnification and recovery rights following the sale.
  • Pilots elected ALPA representation in April 2014; negotiations for a first collective bargaining agreement were expected. Management did not expect the election itself to materially affect the financial statements.

Important facts for investors to verify

  • Separate recurring airline earnings from the LiveTV disposal gain when assessing nine-month net income and EPS.
  • Track whether capacity growth translates into revenue and margins as labor, airport, depreciation and other operating costs rise.
  • Assess liquidity against the $15.365 billion of contractual obligations, aircraft commitments, debt maturities and financing needs.
  • Monitor fuel-price exposure, hedge coverage and possible collateral calls, as well as winter/weather disruption and Northeast operational performance.
  • Follow the pilot arbitration appeal, JFK remediation costs and insurance recovery, and the WestJet-related indemnity and counterclaim exposure.