JetBlue Airways Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and operating results
JetBlue attributed growth to its network strategy, including Boston and newer markets, and continued expansion in the Caribbean and Latin America. Q2 capacity increased 5.5% year over year; passenger revenue growth reflected higher capacity, yield and load factor.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,277 | $1,151 | $2,480 | $2,163 |
| Operating income | $130 | $86 | $219 | $131 |
| Net income | $52 | $25 | $82 | $28 |
| Diluted EPS | $0.16 | $0.08 | $0.25 | $0.10 |
| Operating margin | 10.2% | 7.5% | 8.8% | 6.1% |
Q2 passenger revenue rose 12% to $1,171 million. Average fare was $159.58, up 1%; load factor increased 3.8 percentage points to 85.3%. Operating revenue per available seat mile (RASM) rose 5.2% to 12.82 cents. Operating expense per available seat mile (CASM) rose 2.1% to 11.51 cents; excluding fuel, it rose 5.6% to 6.99 cents. Fuel was about 40% of operating expense, according to management.
For the first half, passenger revenue increased 16%; capacity grew 8.6%, yield rose 3.5%, and load factor improved 2.7 points to 84.1%. Six-month RASM rose 5.6% to 12.72 cents, while CASM increased 2.5% to 11.60 cents.
Cash flow, liquidity and debt
For the first six months, operating cash flow was $490 million, compared with $406 million a year earlier. Investing cash outflow was $263 million, including $314 million of capital expenditures; financing cash outflow was $248 million. Cash and cash equivalents ended the period at $652 million, versus $673 million at year-end 2011. Short-term investment securities were $560 million. Management reported unrestricted cash, cash equivalents and short-term investments of approximately $1.21 billion, and working capital of $47 million, down from $216 million at year-end.
At June 30, current maturities of long-term debt and capital leases were $265 million, short-term borrowings were $2 million, and long-term debt and capital lease obligations were $2.626 billion. JetBlue repaid approximately $265 million of principal and issued $108 million in equipment notes during the half; weighted-average interest on long-term debt was 4.5%. The company had seven unencumbered A320 aircraft. Contractual obligations totaled $13.311 billion, including $5.440 billion of flight-equipment commitments. Management said liquidity should meet cash requirements for at least 12 months.
Material changes and unusual items
- Q2 maintenance materials and repair expense increased 59% to $85 million; management cited fleet aging, heavier maintenance checks, and disruption after an engine-maintenance provider entered liquidation. Average fleet age increased to 6.3 years from 5.7 years.
- JetBlue recorded approximately $10 million of gains from selling two EMBRAER 190 aircraft and six spare engines. It also recorded an approximately $2 million gain related to early debt extinguishment.
- Q2 fuel cost per gallon decreased 2.8% to $3.22, but first-half fuel cost per gallon rose 3.1% to $3.23. Management reported fuel-hedge coverage of about 27% of Q3 forecast consumption and approximately 30% for 2012 overall; fixed forward-price agreements covered about 18% of remaining 2012 forecast consumption.
- Capital spending and growth plans remain substantial. Firm aircraft and spare-engine commitments were approximately $5.44 billion, with deliveries scheduled through 2021. Management noted financing may not be available on attractive terms and that aircraft additions increase fixed costs.
Outlook, risks and contingencies
Management expected 2012 capacity growth of approximately 6.5%–8.5% versus 2011. Assuming fuel at $3.18 per gallon, including taxes and net of effective hedges, it forecast full-year CASM growth of 1%–3%, primarily due to maintenance costs and profit sharing. The company planned further network expansion, including new destinations, and continued investment at JFK and San Juan. Management cautioned that demand, pricing and quarterly results may fluctuate and that the competitive pricing environment had not supported the industry-wide fare increases seen in 2011.
Fuel-price volatility is a key exposure: a hypothetical 10% fuel-price increase, after hedges, was estimated to increase annual fuel expense by approximately $166 million. Other stated risks include economic weakness, competition, maintenance-cost inflation, debt and fixed obligations, labor and supplier issues, weather and operational disruptions, and congestion in the New York market.
The DOT was investigating five October 2011 flights held on the tarmac for more than three hours; potential penalties were stated as approximately $15 million, but the company could not estimate whether or how much would be assessed. A pilot employment-agreement arbitration involved approximately 944 current and 26 former pilots seeking back pay and related damages; the 2002 claims were withdrawn in July 2012, and management intended to defend the remaining claims. A California call-recording case reached a settlement in May 2012; the company expected insurance to cover the settlement and legal costs.
Important facts for investors to verify
- Whether passenger demand, fares and load factors sustain revenue growth as capacity expands.
- Whether maintenance costs moderate after fleet sales and maintenance-provider changes, and how fleet aging affects future CASM.
- Actual fuel prices, hedge outcomes and exposure beyond the disclosed coverage and sensitivity estimate.
- Funding and timing of aircraft commitments, debt maturities—including the 2014 maturity peak—and related financing costs.
- Outcomes and potential financial effects of the DOT investigation and pilot arbitration, and confirmation of insurance coverage for the call-center settlement.