JetBlue Airways Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Figures are unaudited; dollar amounts are in millions unless otherwise stated.
Business context and results
JetBlue grew capacity and continued expanding its network, particularly in the Caribbean and Latin America. The company reported stronger revenue and earnings than in the comparable 2011 periods, while fleet aging drove a sharp increase in maintenance costs.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,308 | $1,195 | $3,788 | $3,358 |
| Operating income | $113 | $108 | $332 | $239 |
| Net income | $45 | $35 | $127 | $63 |
| Diluted EPS | $0.14 | $0.11 | $0.39 | $0.21 |
| Operating margin | 8.6% | 9.0% | 8.8% | 7.1% |
| Pre-tax margin | 5.6% | 4.7% | 5.5% | 3.1% |
| Operating cash flow | — | — | $541 | $500 |
Financial position and operating metrics
- At September 30, cash and cash equivalents were $542; current investment securities were $522 and long-term investment securities were $150. JetBlue reported unrestricted cash, cash equivalents and short-term investments of approximately $1.064 billion, or 22% of trailing-twelve-month revenue.
- Working capital was a $38 deficit, compared with $216 of positive working capital at December 31, 2011. Management said this deficit is customary in the airline industry and expected available liquidity and internally generated cash to cover obligations for at least 12 months.
- Long-term debt and capital lease obligations were $2,603, with $268 of current maturities and $52 of short-term borrowings on the balance sheet. The company reported $2,756 of long-term debt carrying value in its debt note; these measures have different stated scopes. Long-term debt’s weighted-average interest rate was 4.5%. Scheduled debt maturities peak in 2014.
- Nine-month investing cash outflow was $448, including $356 of capital expenditures and $61 of aircraft pre-delivery deposits. Financing cash outflow was $224. Cash decreased by $131 from year-end 2011.
- Q3 capacity (ASMs) increased 8.6%; load factor rose 0.3 percentage points to 84.8%; yield increased 0.8%; and operating revenue per ASM rose 0.7%. Operating expense per ASM increased 1.1%, while expense per ASM excluding fuel rose 3.7%.
- For the first nine months, capacity increased 8.6%, load factor rose 1.9 points to 84.4%, yield increased 2.6%, and operating revenue per ASM rose 3.8%. Operating expense per ASM increased 2.0%, and expense per ASM excluding fuel rose 2.8%.
Changes versus prior year
- Q3 revenue increased 9%, principally from 9% capacity growth, 1% higher yield and a 0.3-point load-factor improvement. Q3 net income rose to $45 from $35.
- Nine-month revenue increased 13% and net income approximately doubled to $127 from $63, supported by passenger revenue growth and better load factors and yields.
- Q3 operating expenses increased 10%; maintenance materials and repairs rose 44% to $85, reflecting heavier maintenance needs as the fleet aged. Nine-month maintenance expense increased 56% to $258. Average fleet age rose to 6.6 years from 5.9 years.
- Nine-month fuel expense rose 9% to $1,364, reflecting greater consumption and a 1% increase in average fuel cost per gallon after hedging. Q3 average fuel cost was $3.17 per gallon versus $3.25 a year earlier.
- Debt and capital lease principal declined by $308 during the first nine months, partly offset by $131 of new equipment notes. The company sold two leased Embraer 190 aircraft and six spare engines, recording approximately $10 of gains; it will forgo about $6 of annual lease income from the aircraft.
Outlook, risks and unusual items
- Management expected full-year 2012 capacity growth of approximately 7%–9% versus 2011. Assuming fuel at $3.22 per gallon, including taxes and net of effective hedges, it expected 2012 cost per ASM to rise 1.5%–3.5%, primarily due to maintenance costs and profit sharing.
- JetBlue planned new service to Cartagena, Samaná and Grand Cayman in November 2012, Providence in November 2012, and Charleston in early 2013. It reported 22 airline partners and said it intended to pursue further partnerships and profitable network growth.
- Fuel was nearly 40% of operating expenses. JetBlue reported hedging about 27% of expected Q4 2012 fuel use, with fixed-forward-price agreements covering approximately 19% of remaining 2012 forecast consumption. A hypothetical 10% fuel-price increase was estimated to add about $190 annually to fuel expense. A 100-basis-point LIBOR increase was estimated to add about $7 annually to interest expense.
- Aircraft orders and related commitments are substantial: 120 firm aircraft and 10 spare engines, with approximately $5.395 billion of flight-equipment obligations in the contractual-obligations table. The company cautioned that financing may not be available on attractive terms and that aircraft growth will increase fixed costs.
- Hurricane Sandy, after quarter-end, caused extensive airport closures and approximately 1,650 flight cancellations through October 31. Management expected a material effect on operations and financial results but said the amount could not yet be estimated.
- Contingencies include a DOT investigation of five 2011 tarmac delays, with statutory penalties potentially up to approximately $15; a pilot employment arbitration involving about 970 current and former pilots with damages unspecified; and JFK-site environmental remediation preliminarily estimated below $1 to approximately $3, potentially partly covered by insurance. Management said it could not assess the final outcomes of the DOT matter or pilot arbitration.
- The board authorized repurchases of up to 25 million shares over five years; no shares had been repurchased by September 30. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent reporting on Sandy’s total financial impact, recovery costs, and any further flight cancellations.
- Whether elevated fleet-related maintenance expense persists and how the planned fleet and capacity growth affects unit costs and margins.
- Actual fuel prices, hedge settlements and coverage, and the effect of fuel and interest-rate movements on earnings and cash flow.
- Aircraft delivery, financing and capital-spending plans against the company’s sizable contractual commitments and upcoming debt maturities.
- Developments and potential liabilities in the DOT investigation, pilot arbitration, and JFK environmental matter.